What is Binance Liquid Swap?
Binance Liquid Swap is a product that uses principles from the Automated Market Maker (AMM) model, which is very popular in the decentralized finance ecosystem. Users can interact with this product either by providing liquidity or swapping between different crypto assets.
Liquid Swap brings the AMM design into Binance’s centralized platform, providing a very convenient experience for users who already have accounts on the exchange – there’s no need to manage different cryptocurrency wallets or worry about gas fees.
Another advantage of Liquid Swap is that it enables access to assets and token pairs that can be hard to find on standard DeFi AMMs. For example, you can provide liquidity for the BTC/BNB trading pair, or ETH/BTC. The Liquid Swap product features an extensive selection of pools, covering assets like Binance Coin, Bitcoin, stablecoins, and altcoins.
Through Liquid Swap, users can provide liquidity to a pool of their choice and earn a passive income – in exchange for providing liquidity, users receive a reward (typically in the form of BNB), as well as a portion of the transaction fees collected by the pool.
Why provide liquidity on Binance Liquid Swap?
Binance Liquid Swap can be a great product for crypto investors that are interested in accumulating BNB.
BNB was launched in 2017 as Binance’s exchange token, but its utility has grown far beyond its initial design. For example, BNB is now the native asset of the Binance Smart Chain blockchain, which has helped it reach new highs and become a top 5 cryptocurrency by market capitalization. BNB started the year trading below $40, but reached as high as $690 by May.
It’s also a solid option for those who already hold BNB and want to increase their holdings, as Liquid Swap has many pools that include BNB. Most of the popular on-chain AMMs are dominated by ETH pairs.
How does Binance Liquid Swap work?
For the purposes of this article, we’ll assume that you already have an account on Binance. If you don’t yet have an account, you’ll need to create one before you can provide liquidity via Binance Liquid Swap and start to earn BNB on Binance.
Find the pool you want to provide liquidity for
In order to add liquidity on Binance Liquid Swap, head over to the “Finance” section at the top navigation menu of your Binance account and select “Liquid Swap”.
Then, choose the “Pool” subsection to see the list of pools that are supported by the Liquid Swap product.
Binance differentiates between “Stable” and “Innovative” pools. These pools utilize different market-making models that are best suited for the types of assets that are included in the pools. On the surface, Stable pools offer lower yields than Innovative pools, but this is balanced out by the fact that they are less risky.
You can see which pools fall into the Stable category by going to the “Pool” tab and checking the “Hide Unstable Pools” option. You can also check the “Match My Available Assets” to only display pools containing the cryptocurrencies you already have in your Binance account.
In this example, we’ll be looking at the USDT/BNB pool. Let’s get started by clicking the “Add” option next to the pool.
Before you can provide liquidity on Liquid Swap, you will have to hold at least one of the pool’s assets on your Binance account. For this example, you would have to hold either USDT or BNB. The ideal situation would be to own both USDT and BNB, as this lets you start providing liquidity with 0 fees. If you only have USDT, for example, you will have to pay a fee to convert a portion of your USDT into BNB.
Now, let’s take a look at the different parameters that are available to you when setting up as a liquidity provider on Liquid Swap.
After selecting a pool, you’ll have the option of either adding both of the pool’s assets or only one asset. Due to the way AMMs work, every user has to provide both of the pool’s assets. In case you only hold one of them, Binance will automatically convert a portion of it to the other asset (for a fee). The ratio between the two assets will depend on market conditions.
Under “Total yield”, you will see the estimated annualized return for liquidity providers in the specified pool. This total yield consists of a reward (in our example, the reward is in the form of BNB), as well as an estimate of how much you will collect from trading fees.
After adding liquidity, you can check out the status of your different positions under the “My Share” section. Here’s an example of what you might see:
In this section, you can also claim the rewards that you have accumulated by providing liquidity.
If you want to stop providing liquidity and get full access to your assets, you can do so in the “Redeem” section of the Liquidity tab. The redemption process is instant.
Impermanent loss risk
The Automatic Market Maker model is not risk-free for liquidity providers. While yields can be substantial in favorable market conditions, impermanent loss is something that liquidity providers need to watch out for. Impermanent loss comes into play when the price of a cryptocurrency changes compared to its price when you used it to provide liquidity. If the ratio between the pool’s two cryptocurrencies changes significantly, providing liquidity on AMMs can be less profitable than simply holding the two assets in a wallet.
You can reduce the impact of impermanent loss by providing liquidity in pools where the two assets stay in a tight price range. For example, a pool consisting of two dollar-pegged stablecoins (let’s say USDT and USDC) will have a much smaller risk of impermanent loss for liquidity providers. Impermanent loss can also be mitigated through the transaction fees collected by liquidity providers, but this will depend on market conditions.
To learn more about impermanent loss, you can check out this helpful article on Binance Academy.
The bottom line
Binance Liquid Swap is a valuable alternative to DeFi automated market makers and presents an attractive option for cryptocurrency investors who want to increase their holdings without actively trading in the volatile cryptocurrency market. Many of the pools offer rewards in the form of BNB, which is a highly liquid cryptocurrency with a large market cap. Liquid Swap also offers users a lot of flexibility, as it has stable pools with a low risk of impermanent loss, as well as riskier pools that have the potential to provide bigger yields.
If you want to earn some extra BNB, Liquid Swap is definitely an option that’s worth checking out.
Source link: https://coincodex.com/article/11612/earn-bnb-on-binance-by-providing-liquidity-binance-liquid-swap-explained/