When you are the first or second onwards to add your token to a Revoluzion Liquidity Pool (LP), you will receive RVZ LP tokens and share in the fees. RVZ LP tokens represent your portion of the LP and are created based on the tokens you deposited into the pool. For example, if you deposited RVZ and BNB into a Revoluzion LP, you would receive RVZ-BNB LP tokens.
As a liquidity provider (LP), you can earn trading fees whenever someone uses the LP you contributed to. When a trade is made on Revoluzion DEX Swap, the trader pays a 0.20% fee, of which 0.125% is added to the LP of the swap pair they traded on.
For example (to understand better, example if 1 RVZ is same value with 1 BNB):
If you hold 10 RVZ LP tokens representing 10 RVZ and 10 BNB
That means, each RVZ LP = 1 RVZ + 1 BNB
And someone trades 10 RVZ for 10 BNB
And another someone decides to trade 10 BNB for 10 RVZ
The RVZ/BNB LP will now have 10.0125 RVZ and 10.0125 BNB
Each RVZ LP token will now be worth 1.000125 RVZ + 1.000125 BNB
And you will have earned a 0.125% trading fee.
It is important to note that providing liquidity carries some risk, such as the possibility of impermanent loss. Impermanent loss is the difference in value between holding tokens in an automated market maker (AMM) versus holding them in your wallet. It can occur when the value of the tokens in the LP changes relative to their value in your wallet.
For example, if the value of the RVZ token in your wallet increases relative to the value of the BNB token in the LP, you may experience impermanent loss. It is important to understand and consider the potential for impermanent loss when deciding whether to provide liquidity.
Read below for example of impermanent loss.
What is Impermanent Loss?
Impermanent loss is the difference in value between holding tokens in an automated market maker (AMM) versus holding them in your wallet. It can occur when the value of the tokens in the liquidity pool changes relative to their value in your wallet.
Here is an example to help illustrate impermanent loss:
Imagine that you have 1,000 RVZ tokens and you decide to provide liquidity to a RVZ/BNB liquidity pool on a decentralized exchange (DEX). You contribute 500 RVZ and 500 BNB to the pool (this example means that 1 RVZ is same in value to 1 BNB).
At this point, the value of the RVZ and BNB tokens in the pool is equal to their value in your wallet.
However, let's say that the value of RVZ increases relative to BNB over time. As a result, the value of your 500 RVZ tokens in the pool decreases, while the value of your 500 BNB in the pool increases.
When you decide to remove your liquidity from the pool and convert your tokens back to RVZ and BNB, you may find that the value of your RVZ and BNB tokens is not equal to what it was when you initially contributed them to the pool. The difference in value is known as impermanent loss.
In this example, if the value of your RVZ and BNB decreased while they were in the liquidity pool, you would have experienced impermanent gain instead of impermanent loss.