Liquidity Pools: What are they? Why are they needed? How do I stake? What are the risks?

8 min readJun 10, 2023

This article aims to educate and inform users on the basics of Liquidity Pools and their use within the BREWSKI Labs eco-system. The end result is to understand how Liquidity Pools work and what purpose they serve in the BREWSKI Labs eco-system and how to provide liquidity to the Balancer Liquidity Pools, a follow up article will then explain how to use the Balancer stake to earn 20% APR via the BREWSKI Labs website.

What are Liquidity Pools?

You can think of a Liquidity Pool (LP) as a pile of 2 crypto tokens (either BREWSKI/ETH or BREWSKI/USDC) locked into a Smart Contract (digital code on the blockchain) to help end users swap one coin for another. It is the Decentralised Finance (DeFi) equivalent of a foreign exchange booth at the airport whereby you exchange your US Dollars for Euro or vice versa.

A Liquidity Provider is a person who provides liquidity (the 2 crypto tokens) to the pool to allow others to exchange from one crypto token to the other.

Liquidity is the oil in the engine to allow the Foreign Exchange booth to function, in the example this would be the amount of US Dollars and Euros the exchange booth holds, to allow travellers to swap their USD for EURO holding small amounts of either currency would limit the size and amount of transactions the exchange booth could handle and this is also true for the BREWSKI Liquidity Pools. However, if there were large amounts of liquidity available then the booth could handle more customers and larger transactions with ease without worrying of having too little of one currency to facilitate transactions.

In the same way the foreign exchange booth charges a fee for any swaps between currencies, liquidity pools also do the same and adds a fee to the transaction cost for end users who are swapping BREWSKI for another crypto and vice versa. However, rather than the single owner of the Foreign Exchange booth taking home all the fees as profits, the liquidity pool distributes these fees to the Liquidity Providers as a thank you for providing liquidity and enabling the Liquidity Pool to function. The fees are distributed to each LP provider proportionally to the total % of liquidity they have provided to the pool. The more liquidity you have provided (or staked as it is known in DeFi terms), the greater % of the total fees received.

On top of the LP swap fees, we are incentivising the community to provide (stake) liquidity by paying 20% APR on all liquidity that is staked.

Why does BREWSKI need Liquidity Pools (LPs) ?

The Liquidity Pools will be the foundation that powers the ‘BREWSKI App & Wallet’. To make life easier for the general public to begin using the BREWSKI App to make food & drink purchases within the BARSKI bars we need to make onboarding them and getting started as easy as possible.

Therefore, when they download the app, the equivalent of a MetaMask crypto wallet will be created to hold their BREWSKI coin and it would make sense to allow users to buy BREWSKI coin direct from within the app without having the complex process of connecting to and using Decentralised Exchanges (DEXes) such as Balancer or Uniswap. The BREWSKI app will be seamlessly linked to the BREWSKI-USDC and BREWSKI-ETH liquidity pools as the source of that BREWSKI coin.

Going back to the Foreign Exchange booth in the airport example. In order to allow the BREWSKI App users the ability to easily purchase BREWSKI, the underlying liquidity pools need to be deep enough (have enough liquidity in them) to facilitate these transactions.

There are 2 ways to solve this:

1) BREWSKI Labs provide all the liquidity and take all the fees, this ensures there is enough liquidity but offers no incentive for anyone holding BREWSKI coin to do so until other products (the App, the Brewski Voting Council or NFTs) are released.

2) BREWSKI Labs offer incentives to early adopters of BREWSKI coin to provide liquidity which then rewards those early adopters and encourages the community to be more actively involved in the project and how it is run.

These incentives add an inflationary aspect to the BREWSKI coin. This means that over time the total supply of BREWSKI coin increases as more tokens are released from the BREWSKI treasury as rewards for staking liquidity are distributed. This is then balanced by the deflationary aspect of the BREWSKI Labs eco-system with 50% of all BREWSKI coin used for purchases of NFTs will be burnt (destroyed).

Risks in Providing Liquidity

Liquidity Pool provision is not without risk. The most common and talked about risk is Impermanent Loss (IL). Simplified to a single sentence:

Impermanent Loss is the difference between the value of holding assets in a pool (providing liquidity) versus holding them outside of the pool (in your wallet not providing liquidity)

This means that if the value of BREWSKI rockets up in value (e.g it multiplies 5x) and while it is at a higher price you decide to withdraw your liquidity you will receive less value tokens overall than if you simply held the tokens therefore making the Impermanent Loss permanent. However, if you do not withdraw liquidity and the price returns to it’s original price the Impermament Loss is cancelled out.

It is also important to note that Impermanent Loss does not take into account the rewards you get for providing liquidity from the swap fees and the 20% APR incentives. Therefore, you can calculate both the Impermanent Loss here:
https://www.coingecko.com/en/impermanent-loss-calculator

There is a excellent detailed visual walkthrough of what is Impermanent Loss with an example here:
https://www.youtube.com/watch?v=8XJ1MSTEuU0

It has been shown that a 80/20 ratio pool is around 50% better at negating the risks of IL compared to a regular 50/50 ratio pool. This is explained in detail here:
https://gov.meritcircle.io/t/deploy-new-staking-module-to-a-balancer-80-20-pool/461

Ultimately, as with all investments, only invest in and provide liquidity at a level you are comfortable with and ensure you fully understand the risks.

How do I provide Liquidity to Liquidity Pools?

To provide Liquidity to Liquidity Pools you first need to decide which pool you want to provide Liquidity to:

BREWSKI Coin (BREWSKI)-Ethereum (ETH)
https://app.balancer.fi/#/ethereum/pool/0xb8e2cbb2455e80ad0eb536ae30a5290bdd7baa9100020000000000000000055f

BREWSKI Coin (BREWSKI)-USD Coin (USDC)
https://app.balancer.fi/#/ethereum/pool/0x77b692c5ca2cceaeef4dcc959d6c3bd919710b6600020000000000000000055e

Both pools have a coin ratio of 80% BREWSKI and 20% the other token, so for example if you were to stake $100 in total liquidity into the BREWSKI-ETH pool you would need $80 worth of BREWSKI coin (which at current price of approx $0.01 this would be 8000 BREWSKI) and $20 worth of ETH (which equals approx 0.0115 ETH).

Note: It is possible to stake an unbalanced amount such as an equal amount of both coins (50/50 ratio) or even just one single coin (e.g 100% BREWSKI), however, the pool would then rebalance the amount staked by buying/selling the tokens staked to make it equal the 80/20 ratio, this could cause the price to fall if there is low liquidity in the pool or the amount staked is large. It is therefore advisable to stake liquidity as close to the 80/20 ratio as possible.

You will also need approx 0.01 ETH (around $12 worth) in your wallet to pay for gas fees.

Steps to provide Liquidity

Goto the relevant pools URL (see links above)
Click ‘Connect wallet’ button
(if on mobile choose WalletConnect then Metamask)
Choose Add Liquidity
You will then be shown a screen to decide how much Liquidity you wish to stake. Enter values for each token.
Max: provides the maximum liquidity of the tokens that are available in your wallet.
Optimize: uses the maximum balance of tokens in your wallet that also minimise Price Impact
Click Preview to be shown a screen summarising what liquidty you will provide
Next follows the 3 authorisation / approval steps.
You will then need to ‘Approve BREWSKI for adding Liquidity’. This is approving Balancer to be able to remove funds from your MetaMask. This transaction will cost approx 0.001 ETH (around $1.75 at current prices), once approved wait approx 30 secs — 1 min for the transaction to approve on the blockchain
You will then need to ‘Approve USDC (or ETH) for adding Liquidity’. This is approving Balancer to be able to remove funds from your MetaMask. This transaction will cost approx 0.001 ETH (around $1.75 at current prices)once approved wait approx 30 secs — 1 min for the transaction to approve on the blockchain
The final transaction is to actually remove funds from your wallet and deposit them to the Liquidity Pool. Click the ‘Add Liquidity’ button. The transaction will cost approx $7.00 - $8.00 depending on gas fee costs.

Congratulations! you have just staked Liquidity in a BREWSKI Liquidity Pool, as a receipt of your stake your wallet will be credited with either:
80BREWSKI-20USDC or 80BREWSKI-20ETH tokens to confirm your receipt.

You will now start earning a % of the fees collected for anyone who uses the Liquidity Pool to exchange BREWSKI for either ETH or USDC. The % received will be relevant to what % your liquidity stake relevant to the total amount staked. These fees are automatically added to your Liquidity Pool staked amount.

We will shortly release ‘BREWSKI Incentivised Staking’ whereby you stake the 80BREWSKI-20USDC or 80BREWSKI-20ETH tokens (that you received from staking Balancer) on our website to then begin earning 20% APR on the amount you have staked. More details on this to follow..

Useful Info

You can follow all transactions on the blockchain at
https://etherscan.io and entering your wallet address

You can also track the current price of Gas on the Ethereum blockchain to get an approximate idea if current transactions have high gas fees here:
https://etherscan.io/gastracker
FYI, around 20 Gwei is a low Gas period, above 50 Gwei is a high period, anything over 100 is just crazy and you’re almost certainly better off waiting and trying another time.

Another useful resource is a Gas price heatmap telling you the best times per day to make transactions:
https://milkroad.com/ethereum/gas