Osmosis has launched the first IBC-compliant AMM on the Cosmos Network blockchain using which clients can exchange data between multiple blockchains, stake, and add tokens to the liquidity pools.
Osmosis is run by liquidity providers; the protocol has introduced an innovative mechanic called liquidity incentives.
In this guide, we will illustrate how, using Persistence (XPRT) as an example, you can add tokens to the pool using the Osmosis Zone platform.
How Pools Work
To participate in pools and receive rewards, users need to supply liquidity or, in other words, deposit tokens into a pool. This process is called liquidity provision (LPing).
The very process of generating income from tokens added to the pool is called liquidity mining. Unlike other methods of generating income, such as staking, lending, or deposits, liquidity mining differs in that it is necessary to add not one token to the pool, but a pair, for which LP tokens are manufactured. For example, if you decide to add tokens to the XPRT-OSMO pool, then you will need to add XPRT and OSMO.
Note: as a rule, users add tokens at a 1: 1 ratio in dollar terms and receive LP tokens that can be involved in mining. In this case, if the price of OSMO and XPRT differ, you can add tokens in proportion to their value to the paired token. To add all coins to the pool, convert the larger share to equalize the dollar amount of tokens. You don't have to calculate the ratio yourself since Osmosis automatically displays the proportions of the shares.
Osmosis uses a balancing protocol that not only provides the functionality of adding tokens with different “weights” but also contributes more than two tokens to one pool, which makes the platform innovative in this area. Neither Uniswap, 1inch, nor PancakeSwap, some of the largest automated market makers in the DeFi industry, have this capability yet.
As long as the user owns the LP tokens added to the pool, they receive rewards but cannot use the tokens. To return them, the user needs to redeem the tokens by exchanging them for LP tokens.
Let's briefly describe the mechanics of the process, from adding and receiving rewards to buying out tokens:
- Adding and receiving LP tokens to the pool. The user adds XPRT and OSMO tokens to the XPRT-OSMO pool, pays the network commission, and then they are credited with LP tokens.
- Receiving awards. While the bonded LP tokens are with the owner, after the extraction of each block, he is awarded rewards in OSMO tokens. You can withdraw rewards at any time while the LP tokens remain intact.
- Buyout. When a user wants to return tokens, he needs to exchange LP for XPRT and OSMO. You also need to pay a commission for this.
To add tokens to the pool again and receive rewards, you need to repeat the cycle.
Important: during the participation in the liquidity mining process, holders bear the risks (unlike staking), known as non-permanent losses (impermanent loss). This is due to the different rates of change in asset prices, due to which the proportions change greatly. However, as long as the tokens are in liquidity pools, these losses are impermanent. But if at this time the holder redeems his tokens, then the losses will become permanent.
Types of rewards in Osmosis
Almost all AMMs provide only one type of reward - payments in native tokens. Uniswap pays liquidity providers in UNI tokens and PancakeSwap in CAKE tokens. Osmosis went further here, providing two types of rewards:
- In OSMO tokens;
- Additional rewards that any community member can set.
For example, Persistence can introduce additional incentives by adding XPRT tokens for distribution to liquidity providers.
Participation programs (gauges)
Depending on the selected gauge (blocking period), the profitability of the pools will differ: the longer the bonding time, the more rewards the liquidity provider will receive. Here is an example of how much the profitability will differ if XPRT-OSMO tokens are blocked for one, 7, and 14 days:
You can read more about liquidity mining using Osmosis Zone in the original article.
How to add tokens to the liquidity pool
Let's provide an example of using XPRT as an example. The pool XPRT-OSMO is the most profitable pool at the time of this writing, which charges liquidity providers up to 1310% per annum. First, you need to get LP tokens and add liquidity to the platform. Simply top up your balance with XPRT and OSMO tokens.
Note: if a token from the pair is missing or you have other tokens supported by Osmosis Zone, you can top up your wallet balance with them and then convert to XPRT and OSMO using the built-in swap.
Please note that the token ratio must be 1: 1 in dollar terms. For example, at the time of this writing, the ratio between XPRT and OSMO tokens was 1: 2.18. Thus, in order for the ratio of shares to be equal, 1 XPRT and 2.18 OSMO must be added to the pool. Now let's take a step-by-step look at the process of adding tokens to the Osmosis liquidity pool.
1. Top up XPRT balance in Keplr wallet
Click on the expansion screen in the middle top, as shown in the screenshot, and select the Persistence network.
Then just click on the address bar below the wallet name to get it.
Send XPRT tokens to this address. This can be done from the Persistence Wallet or Cosmostation. If you do not have a wallet and XPRT tokens, then you can buy them on the Ascendex and Gate.io exchanges and then withdraw them to the Keplr wallet.
2. Buying OSMO tokens
OSMO tokens so far are only supported by the Keplr wallet, and you can buy tokens only using the Osmosis Zone in the Trade tab. You can buy OSMO with any token available on the Osmosis exchange.
Note: you don't have to pay gas to buy OSMO tokens, so you can set a zero commission.
In the example in the guide, we added funds to the Keplr wallet with ATOM tokens and exchanged them for OSMO. Enter the amount of ATOM you want to sell or the OSMO you want to buy and click Swap.
3. Mining liquidity
So, now you have XPRT and OSMO in your wallet balance, and you can start mining liquidity. Click Pool in the left menu and select Pool # 15.
Then click Add / Remove Liquidity, and in the upper field, specify the amount of XPRT you want to add to the pool. The amount of OSMO tokens required to be added will be displayed automatically.
If there are enough funds in the wallet for both tokens, then the Add Liquidity button will become active. Click on it, and confirm the transaction (Approve) in the Keplr extension window, choosing zero commission.
If the transaction is successful, a balance of LP tokens will be displayed on the dashboard. To continue, click on the button Start Earning located under the LP balance.
Select the number of days for which you want to block LP tokens, then enter their amount and click Bond. Confirm the transaction in Keplr again as you did in the previous step.
Note: after each successful transaction, a notification pops up in the upper right corner. By clicking on it, you can go to the Mintscan explorer site, where the details of the transaction are displayed.
After that, in the Osmosis Zone dashboard, the balance of LP tokens will decrease by the blocked amount, which is displayed in the upper left corner.
Congratulations! You have become a liquidity provider for the pool, and from now you will start receiving rewards in OSMO every day! The counter of the accrual of rewards will be displayed in the Pools tab along with your contribution.
Some of the rewards in OSMO, right on the platform in the Trade tab, can be exchanged for a paired token to increase your share in the pool (or withdrawn as income).
Withdrawing LP tokens from the pool
You can withdraw LP tokens from the pool by clicking Add / Remove Liquidity in the upper left corner and selecting the Remove Liquidity tab. You will see a window with a slider that allows you to adjust the percentage of your pool to be withdrawn. After selecting the amount, click Remove Liquidity.
After confirming the transaction through Keplr, the balances of coins from this pool, in our case, OSMO and XPRT, will be increased (which can be immediately monitored in the Assets tab), and a small commission will be deducted from your Available LP tokens balance, which should not be zero when performing this transaction.
Now you know how to provide liquidity to liquidity pools on the Osmosis Zone. However, be aware of impermanent losses which could neutralize your income. To balance risks, you may consider sharing assets between liquidity mining and staking.
Learn how to stake XPRT from Everstake’s guides:
- How to Delegate Persistence (XPRT) in Cosmostation Crypto Wallet
- How to Delegate XPRT in Persistence Wallet
Unlock new opportunities in the crypto space with Everstake. Happy staking!
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