FAQ: Liquidity Provider Rewards on Liquidswap

We get a lot of questions from Liquidswap users about the rewards in liquidity pools. How is the APR calculated? How do you claim the rewards? Why is the final amount sometimes less than expected? We’ve got answers for these and other common questions from our community.

1) Where do liquidity provider rewards come from?

Liquidity provider (LP) rewards come from transaction fees. Every trade on Liquidswap is subject to a fee: 0.30% for regular pools and 0.04% for stable pools. The fee is paid in input tokens: if you are swapping USDT for USDC, the fee is charged in USDT.  

By default, 66.7% of the fees currently go to liquidity providers. The remaining 33.3% go to the Treasury. Splitting the fees is a common practice across DEX platforms. However, in some  pools, 100% of the fees go to the liquidity providers.

To give you a more concrete idea: the 24-hour volume in the APT-USDC LayerZero pool on Liquidswap was $256k on April 17. The fee is 0.30%, so the total fee amount for the day was $768 (256,000*0.003). 66.7% of that is $512.25 in total LP rewards for that day.

2) How is your share of the rewards calculated?

Your share of the rewards is directly proportionate to your share of the liquidity in the pool. This share constantly fluctuates as liquidity providers join and leave.

Example 1: You’ve created a pool, added liquidity, and nobody else joins it. You are the only liquidity provider with a 100% share, so you’ll get all of the LP rewards for this pool.

Example 2: There’s $90,000 in liquidity in a pool already, and you join by adding $10,000. The total is now $100k, out of which you own 10%. As long as nobody else joins or leaves, you’ll be entitled to 10% of the rewards.

Example 3: There’s $90,000 in liquidity in a pool, and you join by adding $10,000 24 hours later, somebody else adds $20,000 more, bringing the total to $120,000. Your share decreases from 10% to 8.33% (10,000/120,000). You’ll geet 10% of the rewards from the first 24 hours, and 8.3% after that.

New liquidity providers come and go as often asevery few minutes, so your share of the pool will constantly fluctuate.

3) How is the value of each LP token calculated? How many LPs will I get?

If you deposit $1,000 in one pool, you may get 1 LP. In another pool, the same $1000 deposit may get you just 0.02 LP. Why?

Each pool has a different number of LPs in circulation, and the value of one LP differs. The value depends on the total liquidity in the pool and the number of LPs already in circulation. Let’s look at an example. (The exact calculation is slightly more complicated than this example, as it involves rounding the decimals and a few other technical factors.)  

To calculate the value of 1 LP:

(Current value of 1 LP) = (Total liquidity in the pool)/(Total number of LPs in circulation)

The amount of LPs you receive when joining a pool equals:

(LPs you’ll receive)=(the amount of liquidity you deposit)/(the pool’s current liquidity))*(total number of LPs in circulation).

There is currently no user-friendly way to look up a pool’s smart contract address on Aptos and view the total number of LPs in a pool. So let’s use  a theoretical example.

Example 1: A pool has $90,000 in liquidity and 90,000 LP tokens in circulation. (the number of LPs in circulation is determined by initial liquidity and other factors. Therefore, the current value of 1 LP is $1. If you added $10,000 in liquidity to the first pool, you would get:

(LPs you’ll receive)=($10,000/$90,000)*(90,000 LP)=10,000 LP tokens

After your deposit, the new circulating supply is 100,000 LP. The total liquidity is $100,000, so the value of 1 LP is still $1.

‍Example 2: A pool has  $90,000 in liquidity, but just 500 LPs in circulation. Each LP will be worth $180 (90,000/500 = 180).

If you added $10,000 in liquidity to the pool, you would get 55.555 LP tokens.

(LPs you’ll receive)=($10,000/$90,000)*(500 LP)=55.5555555 LP tokens

The new circulating LP supply is 555.5555555 LP, and the total liquidity is $100,000, so the value of 1 LP is still $180.

3) Does the value of 1 LP stay the same?

The short answer is no. The long answer is that, as the pool’s liquidity value in USD changes, so will the USD value of each LP token.

Example: A pool is composed of tokens A and B, with a total value of $100,000. There are 100,000 LP tokens in circulation, each worth $1. Now suppose that the prices of both   tokens fall by 30%, so the pool’s reserves are now worth $70,000.  The new value of 1 LP is $70,000/100,000 = $0.70.

For simplicity’s sake, we assumed that the ratio of A and B in the pool is the same, the ratio between their prices remained the same, , and that nobody joined or exited the pool, so the number of LPs remained the same. All of these factors can contribute to changes in the value of the LP token. .

4) Where can I find the current APR for Liquidswap pools?

Check out the Pools page or the Stats section. Note that Liquidswap sources APR data from partner APIs, and technical issues may occasionally prevent the APR for a certain pool from being displayed. We try to solve these issues as quickly as possible, but it doesn’t always depend on us. Please let us know whenever this issue arises for you.

5) Why is the APR on some pools missing from the list?

Up-to-date APR numbers are supplied by Pontem’s partners, and we sometimes don’t receive data for certain pairs. For example, this can happen for a new pool that hasn’t been added to the provider’s database yet. We always try  to solve these issues as quickly as possible.

6) How is the pool APR calculated?

APR stands for Annualized Percentage Rate. APY means Annualized Percentage Yield. In the context of pool returns, they mean the same thing: how much you would earn  in a year as a percentage of your deposit, if the return rate remained constant. (Note that APRs for pools fluctuate constantly!)

The APR numbers  on the Liquidswap stats page are based on the swap volume for the past 7 days. The returns for the past 24 hours are divided by 7 and multiplied by 365.

(Note that Liquidswap’s APR data is supplied by our partners via API, and their APR calculation formula can differ slightly from the example below.)

Example:   A pool has $1 million in liquidity and a 0.30% swap fee, with 66.7% of the fees allocated to the liquidity providers. Over a period of 7 days, the swap volume is $2 million, so the pool generated $6,000 in fees ($2,000,000*0.003). Off these, LP token holders will get 66.7%, or $4000. ($6,000*0.667)

The 7-day return rate for the entire pool is:

$4000/$1,000,000=0.004, or 0.4%.

Now let’s calculate the APR, by annualizing this 7-day period:

APR=(0.004/7)*365=0.20867, or roughly 20.9%.

Important: If you see terms like “24H APR”, “7D APR”, or “30D APR” somewhere, that is still an annualized rate! APR is always given for a 365 day period – the only thing that changes is the data used for the calculation.

24 Hour APR is calculated with volumes from the past day, 7 Day APR with volumes from the past week, and 30 Day APR with volume from the past month.

The calculations are:

24H APR: ((rewards for the past 24 hours)/(pool liquidity at the start of the period)*365

7D APR: ((rewards for the past 7 days)/(pool liquidity at the start of the period)*365/7

30D APR: ((rewards for the past 30 days)/(pool liquidity at the start of the period)*365/30

Liquidswap’s 7-day approach is better than using data from just 24 hours, because it smooths out the daily fluctuations in swap volume. For example, volume is generally lower on weekends, so the 24 Hour APR can fluctuate wildly  from Sunday to Monday.

7) Does the APR correctly predict my future returns?

No. This is for a few reasons:

1) Swap volumes change all the time. The pool can become more or less popular and generate more or less fees in the future.

2) Your share in the pool will change. As liquidity providers join or exit the pool, your share of the rewards will change.

3) Token prices can change. As the value of the tokens in the pool changes, so does the value of the pool itself, and the value of your rewards

In other words, if you see a 50% APR, it is simply an extrapolation of current conditions for a year ahead. It’s provided for informational purposes only, and the actual APR can be completely different. Pontem provides no guarantee whatsoever of future rewards. You can even lose money overall if token prices fall.

8) Why do different pools have very different APR?

On Liquidswap, the APR on large pools (over $1 million in liquidity) varies from 0.06% to 30%. That’s because the APR depends on three key factors:

1) Trading volume:  Fees (and rewards by extension) are determined by trading volume. For two pools with the same TVL and curve type (uncorrelated/stable), the one where more trading happens will generate more rewards. For example, APT-USDC LayerZero and APT-USDC Wormhole both have $1M in their respective pool, but the former has a daily volume of $262,000,  while the latter has  $42,000.

2) Swap fees: Regular pools (for uncorrelated assets, like a token and a stableoin or two volatile tokens) on Liquidswap charge 0.30% per swap, versus just 0.04% for stable pools (for correlated assets, like two stablecoins).  Even with the same trading volume, the amount of collected fees will be 7.5x lower for a stable pool.

3) Pool TVL: Think of fee rewards as a pie divided among a certain number of eaters. If you deposit $100 into a pool with  $1 million TVL, you’ll get a much smaller share of  the rewards  versus a pool with $100,000 TVL (given the same trading volume.)

9) How will I get the rewards?

To claim liquidity provider rewards, you need to withdraw some or all of your liquidity from the pool. The tokens you receive will include all of your accumulated rewards, even if you only take out some of your funds.

10) Do APR rewards auto-compound?

No. The rewards simply accumulate in the pool. Auto-compounding means automatically adding interest to the yield-bearing capital body so that you end up earning APR on the already earned rewards. This  does exist in crypto (such as yield farming aggregators), but not in DEX liquidity pools.

11) Why did I get so little in rewards?

Have realistic expectations. Even if the APR is 60%, that translates to 0.164% per day. If you deposited $200 in liquidity for 2 weeks, (assuming constant APR), your rewards will be just $4.59:

$200*0.00164*14=$4.59.

A pool with a high APR tends to attract liquidity providers. Unless the trading volume also increases, the APR will go down, because a pie of the same size (the fees) is divided among more people. Remember that Pontem has no control over liquidity pool APRs.

12) Will I still earn pool APR if I stake LP tokens in a yield farm?

Yes. You earn both the rewards from swapping fees AND farming rewards. By the way, the next batch of Hydroponic Farms on Liquidswap should launch soon, so stay tuned forupdates.

13) Where can I see my accumulated LP rewards?

Pontem is working on a design update to display LP rewards. Stay tuned for announcements!

14) Why is the token ratio in my LPs different when I withdraw them?

We get a lot of questions about this. For example, if you deposit 10 X tokens and 20 Y tokens in a pool and then withdraw the liquidity, you may get 9 X tokens and 22 tokens. Your tokens can be worth less in USD, too.

The reason is that the pool’s composition changes all the time as users make swaps. Your LPs will represent the same proportion of the pool when you withdraw them, but the proportion of X and Y will reflect the current proportion in the pool. This is calculated by the constant product formula: x*y=k.

Example: A pool contains 4,500 X and 4,500 Y tokens (the starting swap price of 1 X is 1 Y), and you add 500 X and 500 Y. Now you own 10% of the pool, which contains 5,000 X and 5,000 Y.

Next, another user decides to swap 1,000 X for Y. According to the constant product formula x*y=k, we get:

k=5,000*5,000=25,000,000

x(new)=5,000+1,000=6,000

y(new)=k/x(new) = 25,000,000/6,000=4,166.66

Now, the pool contains 6,000 X and 4,166 Y. If you decide to withdraw all your liquidity from the pool right after this massive swap, you’ll still get the same 10% of the pool --but it will translate into 600 X and 416.66 Y instead of 500 X and 500 Y.

(Still confused about x*y=k? Then read our article on liquidity pool mechanics.)

Here’s a real-world example:  let’s look at liquidity added to the THL-APT pool on April 12 and the full amount available for withdrawal on April 18 (including rewards). 36.91 THL and 1.997 APT were deposited, but the withdrawal output is 33.17 THL and 2.24 APT.

The staking time was short (6 days), so the LP rewards probably don’t amount to much, and the change in the composition is because   people have been trading APT for THL.

15) Does impermanent loss affect the number of my LPs or their value?

No. Impermanent loss (IL) is the difference between the present value of your LPs, and their value if you had kept the tokens in the wallet instead of depositing them in a pool. It’s a reflection of missed gains, rather than an actual loss of value.

Most DEX liquidity providers will face impermanent loss at some point. This is part of how DeFi works. But you’ll still have the same amount of LPs, and with some luck, you might made a profit. IL is a comparison between what you have and what you could have had under different circumstances.

Example: You have 20 APT, and the current price of APT is $12. You swap 10 APT for USDT and deposit 10 APT and 10 USDT  in a pool. Your stake is worth $240. After a while, you withdraw the liquidity and receive $250: your $240 deposit and $10 in rewards.

However, in the meantime, the price of APT rose to $13. If you had simply held on to those 20 APT without swapping anything, you’d now have 20*13=$260. That $10 difference between what you got in the end and what you could have had is the impermanent loss.

It’s called impermanent loss because, if you wait for the price of APT to go back  down to $12 and then withdraw the liquidity, the difference will disappear. (Check out our article on liquidity pool mechanics for more on impermanent loss.)  

Do you have other questions about liquidity provider rewards? Post them in Pontem’s Telegram chat, and we’ll add the answers to this article. Don’t forget to follow us on Twitter and Discord, too, because Pontem has a lot of updates coming soon.

About Pontem

Pontem Network is a product studio building foundational dApps for Aptos. Our products  include Pontem Wallet; Liquidswap, the first DEX (AMM) for Aptos; browser code editor Move Playground; the Move IntelliJ IDE plugin for developers; and the Solidity to Move translator ByteBabel -- the first implementation of the Ethereum Virtual Machine for Aptos.