Getting Started on DeFi Part 3: Liquidity Provision with DODO

Welcome to the third part of our “Getting Started on DeFi” series, where we continue to explore the dynamic world of decentralized finance. In this installment, we will delve into the fascinating realm of liquidity provision using DODO, a decentralized exchange (DEX) and DeFi services provider. Liquidity provision is an essential component of DeFi, and DODO offers a user-friendly platform for users to contribute their assets and earn rewards in return. This article is perfect if you’re interested in becoming a liquidity provider and playing a vital role in the DeFi ecosystem.

Before we begin, make sure you’ve read Part 1 and Part 2 of the Getting Started on DeFi series.

What is Liquidity Provision and Why Should I Engage in It?

Liquidity Provision is the practice of adding funds to a liquidity pool on a decentralized exchange. These pools contain pairs of tokens that users can trade against each other. As a liquidity provider (LP), you contribute your assets to these pools, helping to facilitate trades. In return, you earn a portion of the trading fees generated by the pool.

But why should you consider engaging in liquidity provision?

• Earning Passive Income: By providing liquidity, you become a crucial part of the DeFi ecosystem. While your assets are in the pool, you earn a share of the trading fees that traders pay. This allows you to generate passive income on your assets.
• Enhancing Liquidity: Your participation in liquidity provision increases the overall liquidity in the market, which benefits traders. More liquidity typically leads to narrower spreads and lower slippage, ensuring that traders get fairer prices on their trades. This way, your liquidity provision helps not just you, but other traders as well.
• Supporting the DeFi Ecosystem: By providing liquidity, you contribute to the success of the DeFi ecosystem. Without liquidity provision by LPs like you, DEXs and other crucial DeFi infrastructure would not be able to function. Your participation strengthens the foundation that underpins DeFi, helping it grow and evolve.

How to Engage in Liquidity Provision on DODO

Despite seeming complex at first, providing liquidity to a liquidity pool is straightforward with DODO. Here’s how you do it:

1. Visit the DODO Platform and Connect Your Wallet: Start by navigating to the DODO platform, located at https://app.dodoex.io/. To initiate liquidity provision, you need to connect your cryptocurrency wallet. DODO supports various wallets, including MetaMask and Trust Wallet. You also need to decide which blockchain network to use. This can be accomplished by clicking the “Connect to a wallet” button to allow it to interact with the DODO dApp, as well as the button to its left to select your desired blockchain network. Once your wallet is connected, you’re ready to start providing liquidity.

2. Select a Pool: Click on the “Pools” tab in the menu bar on the right to navigate to DODO’s Liquidity Provision page. From the “Add Liquidity” tab, choose a liquidity pool that contains one of the tokens you wish to contribute. Alternatively, you can enter the name or address of your desired token in the search bar to find available liquidity pools. Some assets have several liquidity pools, so you can use the TVL (Total Value Locked) and APY (Annual Percentage Yield) information beside each pool to decide which liquidity pool is right for you.

3. Add Liquidity: Click the “Add” button beside your selected pool (1) and an LP dialog will appear to the right of the pool list (2). You can then input the amount of each token that you would like to provide.

Unlike most LP platforms, DODO supports single-token liquidity provision for some pools. This means that you only need to contribute one type of token to a pool in order to engage in liquidity provision (or any amount of either token in the pair), while normally you would need to provide both tokens in a set ratio. When you add liquidity, make sure to check the permitted token ratio for the pool (3). If there is a required ratio, DODO will automatically calculate the amount needed for the second token if you enter the amount you wish to submit for the first token.

4. Confirm and Earn: Once you’ve added liquidity by clicking the “Add” button and confirmed the transaction in your wallet app, you’ll begin earning a portion of the trading fees generated by the pool. Your earnings will depend on the amount of liquidity you’ve contributed, and you will also receive special LP tokens that prove your contributions to the pool. These LP tokens are used when you want to withdraw your funds from the liquidity pool, and also to engage in liquidity mining (stay tuned for a future article!). You can see your current LP activity under the “My Pools” tab.

Conclusion

Liquidity provision is one of the fundamental pillars of DeFi, and DODO provides an excellent platform for anyone looking to become a liquidity provider. By adding your assets to liquidity pools, you earn passive income, support the DeFi ecosystem, and help enhance the trading experience for all users. However, it’s important to remember that liquidity provision carries certain risks, including impermanent loss. Therefore, always conduct thorough research, understand the risks, and manage your assets wisely as you embark on your journey as a liquidity provider.