FAQs

Common questions you might have as a liquidity provider.

What is the difference between swap fee and fee rebate?

The swap fee is the total fee charged to users for executing a token swap. It's the fee that directly impacts the trader and is displayed as "Fees" in the Pool Info panel.

On the other hand, the fee rebate is the portion of the swap fee that is distributed to liquidity providers as a reward for supplying liquidity to the pool. The remaining portion of the swap fee goes to the ALEX Lab Foundation. You can also find the fee rebate percentage in the Pool Info panel.

What is the swap fee percentage that goes to liquidity providers?

The swap fee percentage that goes to liquidity providers is known as the fee rebate. It is typically set at 50% of the swap fee, though it can vary depending on the pool. You can check this percentage in the Pool Info panel.

What are the LP Tokens?

Also know as "Pool Tokens", these tokens are issued to liquidity providers to represent their share of the liquidity pool. The total supply of LP tokens represents the 100% of the pool's funds.

When users add liquidity to a pool, they receive LP tokens as proof of ownership. These tokens entitle them to a proportional share of the pooled assets and a portion of the fees generated by trades (swaps) within the pool.

When liquidity is removed, the user transfers LP tokens back to the protocol. This determines how much of the pool's assets are returned to the user, along with their share of the transaction fees accrued during the time their liquidity was provided.

How does the fee rebate benefit liquidity providers?

The fee rebate is automatically accrued and reinvested into the pool, increasing the overall value of the pool. Since liquidity providers (LPs) hold a share of the pool, their holdings grow in value over time. However, these rewards can only be claimed when LP tokens (representing their share of liquidity) are withdrawn from the pool.

How are fees transferred to the liquidity provider's wallet?

The fees are not directly transferred to the liquidity provider's (LP) wallet. Instead, the swap fees allocated to LPs are accrued and reinvested into the liquidity pool. By holding LP tokens, liquidity providers accumulate their share of the fees over time. These accrued fees become available when they withdraw funds from the pool (i.e. when they remove liquidity). At that point, LP tokens are transferred back to the protocol, and in return, the provider receives their corresponding share of the pool's funds, including the accumulated fees.

Where can I see the fees I've gained so far as a liquidity provider?

While there isn't a direct way to view your fees separately, you can check the "My Liquidity" panel for this purpose, which shows your LP tokens and liquidity provision details. To access it, navigate to the Swap -> Pool tab and select your pool of interest from the list. You'll also see a summarized version above the pool list.

In this panel, the Pooled amount reflects your total token holdings in the liquidity pool, which includes both your initial deposit and any fees you've accrued. Over time, this amount increases as more fees are added. The Indicative Value shows the USD equivalent of your holdings, which may fluctuate due to price changes of the pool's assets, but still provides a useful reference for tracking your gains.

How is liquidity provision related to farming?

Liquidity providers can stake or lock up their LP tokens for a fixed period of time (a selected number of ALEX cycles) to earn additional rewards. These rewards are separate from the earnings generated through liquidity provision, that come from swap operations fees (trading fees). This process is known as Yield Farming, or simply 'Farming'. For more details, explore the ALEX Farming feature.

Can I remove liquidity at any time?

Yes, you can remove liquidity at any time. However, if you've staked your LP tokens for farming, you won't be able to withdraw them until the staking period has ended.

How does impermanent loss happen?

Let's walk through an example of how impermanent loss might look for a liquidity provider (LP).

Carol deposits 100 STX and 150 sUSDT into a liquidity pool. As with ALEX DEX's AMM, the deposited token pair must to be of equivalent value. This means that the price of STX is 1.5 sUSDT at the time of deposit, making Carol's total deposit worth 300 USD.

Now, let's assume the total pool size is 1,000 STX and 1,500 sUSDT, funded by Carol and other LPs. So Carol has a 10% share of the pool.

Next, suppose the price of STX rises to 6 sUSDT. As this happens, arbitrage traders will add sUSDT to the pool and remove STX, adjusting the balances to reflect the new market price. Since AMMs don't use order books, the asset's price in the pool is determined by the ratio between their balances.

With the price change–STX is now 6 sUSDT– the pool now holds 500 STX and 3,000 sUSDT, thanks to the work of arbitrage traders.

So, Carol decides to withdraw her funds. As we know from earlier, she's entitled to a 10% share of the pool. As a result, she can withdraw 50 STX and 300 sUSDT, which now totals 600 USD. At first glance, it looks like she's made a good profit on her initial 300 USD deposit, right?

However, if Carol had simply held onto her 100 STX and 150 sUSDT, their combined value would now be 750 USD.

This shows that Carol would have been better off holding her assets instead of providing liquidity. This is impermanent loss. With that said, this example doesn't account for the trading fees Carol would have earned as a liquidity provider, which could potentially offset or even exceed the loss, making liquidity provision profitable overall.