When you add your token to a liquidity pool (LP), you will receive GOUDA-LP tokens (CowSwap’s version of liquidity provider tokens).
As an example, if you deposited $GOUDA and $BNB into a liquidity pool, you would receive GOUDA-BNB tokens (collectively known as GOUDA-LP token)
The number of GOUDA-LP tokens you receive represents your portion of the GOUDA-BNB liquidity pool. You can also redeem your funds at any time by removing your liquidity.
Providing liquidity is not without risk, as you may be exposed to impermanent loss.
It’s not all bad for liquidity providers as you will also be given a reward in the form of trading fees. Whenever someone trades CowSwap, the trader pays a 0.2% fee, of which 0.17% is added to the liquidity pool of the swap pair they traded on.
- There are 10 LP tokens representing 10 GOUDA and 10 BNB tokens.
- 1 LP token = 1 GOUDA + 1 BNB
- Someone trades 10 GOUDA for 10 BNB.
- Someone else trades 10 BNB for 10 GOUDA.
- The GOUDA/BNB liquidity pool now has 10.017 GOUDA and 10.017 BNB.
- Each LP token is now worth 1.00017 GOUDA + 1.00017 BNB.
To make being a liquidity provider even more worth your while, you can also put your LP tokens to work whipping up some fresh yield on the GOUDA farms, while still earning your 0.17% trading fee reward.