Yield farming is a process where a user provides liquidity to DeFi protocols/pools and is rewarded with a yield/return, usually in the form of the platform’s native token offering.
What are the Liquidity Pools?
Liquidity Pools are pools of tokens, locked in a smart contract to facilitate trading by providing liquidity. They are used by Automated Market Makers (AMM) to reduce price change when trading on the decentralized exchanges.
How does the Yield Farming work in the XPocket app?
Liquidity providers (Yield Farmers) provide assets to the Pocket Swap liquidity pools. In the return, they are compensated with a portion of the swap fees as a reward.
In general, 0.3% fee is taken by the pool contract on every transaction/trade on PocketSwap. And, 0.25% of this fee is divided between the liquidity providers proportionally to their share. For example, if a user provides 50% of the pool’s liquidity, he will earn 50% of the collected fee. The remaining 0.05% of the fee will go towards the POCKET token holders, proportionally.
Depositing assets on PocketSwap is completely permissionless and non-custodial. Liquidity providers can propose new asset pools or add liquidity to existing pools. Anybody can propose a new asset by depositing it. Once a new asset pool is listed, anybody can add liquidity to it. From that perspective, PocketSwap is permissionless. The ability to use and withdraw assets is completely non-custodial. Only the original depositor has the ability to withdraw them, at any time.
Liquidity can be added to existing pools to increase depth and attract swappers. The deeper the liquidity, the lower the fee. However, deep pools generally have higher swap volume which generates more fee revenue. Liquidity providers are incentivized to deposit symmetrically.
Liquidity providers can withdraw their assets at any time. The network processes their request and the liquidity provider receives their percentage according to their ownership of the pool along with the assets they’ve earned.
Liquidity providers deposit their assets in liquidity pools and earn yield in return. Liquidity providers earn a yield on the assets they deposit. For example, someone who has deposited in the BTC/POCKET pool will receive rewards in BTC and POCKET. Yield is paid out to liquidity providers when they remove/withdraw assets from the pool. This yield is made up of fees and rewards. Fees are paid by swappers and traders. Most swaps cause the ratio of assets in the liquidity pool to diverge from the market rate.
The technical part will be added very soon.