Are Pooling and Staking Different?
Similar to the previous article, The Art of Passive Earning by Staking Crypto, earning passively through liquidity pools or “pooling” is somewhat similar to staking while also sharing similarities with yield farming, and as some might say it is the original yield farming. The idea behind pooling is to provide a metaphorical liquid pool that contains a combination of two tokens and once the pool has enough liquid it can then be opened and consequently becomes a liquidity provider swapping tokens within the pool and then being withdrawn by different addresses.
“Liquidity does not exist unless someone else is willing to give you cash in exchange for the piece of paper you want to sell.”
~Peter Bernstein
As you can see from the statement made by Peter Bernstein, liquidity must come from somewhere. Whether it’s money a bank loans out that isn’t really there or it’s online digital crypto assets named rather ridiculously as in the case of PIZZA or HOT DOG (sorry to those who got rug burns). In the case of cryptocurrency, when a new asset is developed the developers have various choices in the way they choose to allocate the unlocked portion that is usually used for early investors. After the initial release of a token and upon listing with exchanges the liquidity can be provided through several different methods that are typically coded into the token smart contract. These will represent more variability as the liquidity for Centralized exchanges (CEX) and Decentralized exchanges (DEX) will undoubtedly differ in various aspects.
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One of the largest differences between the two types of exchanges is that CEX companies like Coinbase are required to adhere to extremely strict political regulations (far more regulations in the state of New York). For this reason, the ability for new companies to create a CEX within the states is like climbing Everest, it can be done but at what cost?
This is where DEX’s like IDEX, Binance DEX, Uniswap, and many more really shine in comparison. With the nature of these exchanges being decentralized, it falls into one of the numerous loopholes that circumvent the regulations imposed on CEX’s. This also creates an issue that the regulated exchanges don’t necessarily have to worry about. That issue is how to provide liquidity to the community in order for them to be able to utilize the DEX in a similar fashion to their regulated counterpart.
The solution to the possible liquidity issue was initially to allocate a specified percentage of each transaction fee to the wallet addresses that “pool” their pair of crypto’s within the exchange. These fees that are allocated to the participants are determined based on how many others are participating, how large the trading volume is, and how much each participant is contributing to each token. Personally, I have witnessed return percentages that ranged from 0.1% per transaction to some absolutely outrageous returns upwards of 100,000% (skeptical at all?). All in all, if you decide to pool your currencies there are various things to keep in mind when vetting the DEX and the tokens you want to use.
When vetting proper DEX’s to participate in one of their numerous pooling opportunities to further improve your passive earning portfolio make sure to get an understanding of both the tokens in the pool and the project that is behind said tokens. If you already know about the projects and are ready to go make sure to take into account the chance for impermanent loss by analyzing the current liquidity and the DEX’s protocol they should have in place to help prevent such occurrences. Another really important thing to take into consideration when trying to create passive earnings through pooling is whether the amount you have to provide liquidity, pay for the fees both to and from the contract, and still profit from the small percentage earned.
Another aspect that is now involved with being a LP is the introduction and implementation of many DeFi projects. With the introduction of DeFi came the wave of Yield Farming which is essentially just participating as a typical LP, but instead of only receiving a percentage of the transaction fee projects have begun further incentivizing participation by paying out dividends of other cryptocurrencies. But I’ll leave the complexities of DeFi yield farming for a future article!
Thank you for taking the time to read my article! I will be writing more passive earning articles that will focus on other methods of earning.
If you have any questions or suggestions for me, please do not hesitate to ask in the comments!
~ Trever Russell
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This article was originally published on Voice.com
