CheeseSwap pools allow you to provide liquidity by adding your tokens to liquidity pools or “LPs”.
When you add your token to a liquidity pool (LP), you will receive Cheese LP tokens (CheeseSwap’s version of liquidity provider tokens).
As an example, if you deposited $PIZZA and $BNB into a liquidity pool, you would receive PIZZA-BNB Cheese LP tokens.
The number of Cheese LP tokens you receive represents your portion of the PIZZA-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. “Simply put, impermanent loss is the difference between holding tokens in an AMM and holding them in your wallet.” - Nate Hindman
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 CheeseSwap, 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 Cheese LP tokens representing 10 PIZZA/Any BEP20 tokens and 10 BNB tokens.
1 Cheese LP token = 1 PIZZA + 1 BNB
Someone trades 10 PIZZA for 10 BNB.
Someone else trades 10 BNB for 10 PIZZA.
The PIZZA/BNB liquidity pool now has 10.017 PIZZA and 10.017 BNB.
Each Cheese LP token is now worth 1.00017 PIZZA + 1.00017 BNB.
To make being a liquidity provider even more worth your while, you can also put your Cheese LP tokens to work whipping up some fresh yield on the PIZZA farms (here), while still earning your 0.17% trading fee reward.
We are taking PIZZA an example.