How to make money by providing liquidity to DEX?
Typically, making money in the crypto industry is associated with mining or trading on exchanges, but this is far from all. Long gone are the days when you could quickly make money mining using a video card on your home computer. Trading is another matter, but sometimes you have to hold for a very long time and wait until the token that you bought cheap grows and it becomes profitable to sell it. Money must work!
Fortunately, there are now many different ways to make money on the crypto market, in addition to mining and trading. One of the most popular ways to make passive money in the crypto world is by providing liquidity to decentralized crypto exchanges (DEX).
What is liquidity providing?
Decentralized crypto exchanges such as Uniswap or PancakeSwap differ from centralized exchanges in that they do not store user funds or execute trades directly. Instead, they use smart contracts that automatically execute transactions between users. This allows participants to independently manage their funds and avoid the risk of losing funds in the event of an exchange hack.
Liquidity is the ability of an asset to be bought or sold without significantly affecting its price. Liquidity providers are market participants who make assets available for trading and provide liquidity.
Decentralized crypto exchanges need liquidity providers because without them, users may face the problem of low liquidity and high bid-ask spreads of assets. Liquidity providers help mitigate this risk by making available assets for trading and providing liquidity on the exchange.
The fees, that a user receives for providing liquidity depend on the volume of transactions that occur in the so-called liquidity pool. The more transactions occur in the liquidity pool, the more fees the user receives.
Since cryptocurrencies are extremely volatile, it is almost impossible to avoid risks. If the asset selected for the liquidity pool loses or gains too much value after the deposit, the user risks not making a profit or even losing money. For example, ETH could double its value within a week, but the fees received would not even cover half of what could be earned by holding the asset. Another main risk is the risk of losing funds if the price of tokens in the pool drops sharply. For this reason, you need to very soberly assess how long you want to provide tokens for liquidity.
How to put cryptocurrency into liquidity on DEX?
Now let’s move on to the practical part. Let’s take the popular decentralized crypto exchange PancakeSwap as an example, and consider BRTR as the token that will be provided. So to put
- Go to the Pancake Swap website and connect your crypto wallet to the exchange. Such a wallet could be MetaMask, for example.
- Select a pair of tokens for which the user wants to provide liquidity. In our example, this will be the USDT-BRTR pair
- Deposit your funds into the liquidity pool.
- Wait for users to start trading on the selected token pair and receive fee for each transaction.
It’s not as complicated as it looks!
Summarizing
As we can see, holding tokens in a liquidity pool is more profitable than simply holding them: money must work! Providing liquidity on decentralized crypto exchanges can be a profitable way to make money. However, the user must be prepared for the risks associated with providing liquidity and be reasonable about the period of time for which he wants to put tokens into liquidity.
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