Adding Liquidity to DiviSwap

Introduction to Liquidity Provision

Providing liquidity to DiviSwap is one of the key ways to participate in the DeFi ecosystem on Chiliz Chain. As a liquidity provider, you deposit pairs of tokens into liquidity pools, enabling other users to trade between these tokens while you earn a share of the trading fees.

Understanding Liquidity Provision

Before diving into the step-by-step process, it's important to understand a few key concepts:

Equal Value Requirement

When providing liquidity, you must deposit an equal value of both tokens. For example, if you want to add liquidity to an ETH/USDC pool, and ETH is worth $2,000, you would need to deposit 1 ETH and 2,000 USDC.

LP Tokens

After adding liquidity, you'll receive LP (Liquidity Provider) tokens that represent your share of the pool. These tokens are needed when you want to withdraw your liquidity later.

Fee Earnings

As traders use the pool, they pay a small fee (typically 0.3% on DiviSwap). These fees are distributed proportionally to all liquidity providers based on their share of the pool.

Impermanent Loss

Be aware that providing liquidity comes with the risk of impermanent loss—a potential reduction in value compared to simply holding the tokens when their prices change relative to each other.

Step-by-Step Guide to Adding Liquidity

Step 1: Navigate to the Pool Page

Start by visiting the DiviSwap website and clicking on the "Pool" tab in the navigation menu. This will take you to the liquidity management interface.

The DiviSwap navigation menu with the Pool tab highlighted.

Step 2: Select "Add Liquidity"

On the Pool page, you'll see tabs for "My Positions," "All Pools," and "Add Liquidity." Click on "Add Liquidity" to proceed.

The Pool interface with the Add Liquidity tab selected.

Step 3: Select the Token Pair

You'll need to select the two tokens you want to provide as liquidity:

1. Click on the first token selector to choose your first token
2. Click on the second token selector to choose your second token
3. If you're creating a new pool, you'll see a notice indicating that this will be a new liquidity pair

Selecting tokens for liquidity provision.

Step 4: Enter Token Amounts

Now you'll need to specify how much liquidity you want to add:

1. Enter the amount for one of the tokens
2. The interface will automatically calculate the equivalent amount of the other token based on the current price ratio
3. You can also click "MAX" to use your entire balance of a token

If the pool already exists, the amounts will be calculated based on the current ratio in the pool. If it's a new pool, the ratio you set will establish the initial price.

Entering the amounts of tokens to provide as liquidity.

Step 5: Review Pool Information

Before proceeding, review the pool information displayed:

• Pool share: The percentage of the pool you'll own after adding liquidity
• Tokens deposited: Confirmation of the tokens and amounts you're adding
• Exchange rate: The current price ratio between the two tokens

Step 6: Approve Token Access (If Needed)

If this is your first time using these tokens with DiviSwap, you'll need to approve the smart contract to access them:

1. Click the "Approve" button for each token that needs approval
2. Confirm the transaction in your wallet
3. Wait for the approval transaction to be confirmed on the blockchain

Note that approval is a separate transaction that requires gas fees. You only need to approve each token once.

Approving tokens for use with DiviSwap.

Step 7: Add Liquidity

Once your tokens are approved:

1. Click the "Add Liquidity" button
2. Review the transaction details in the confirmation modal
3. Confirm the transaction in your wallet
4. Wait for the transaction to be confirmed on the blockchain

Confirming the addition of liquidity.

Step 8: Transaction Confirmation

After the transaction is confirmed, you'll see a success message. You've now successfully added liquidity to DiviSwap!

The transaction success screen showing the completed liquidity addition.

Managing Your Liquidity Position

Viewing Your Positions

To view your active liquidity positions:

1. Go to the "Pool" tab in the DiviSwap interface
2. Select the "My Positions" tab
3. You'll see a list of all your active liquidity positions, including the token pairs, your liquidity amount, and your pool share

The My Positions tab showing active liquidity positions.

Adding More Liquidity

To add more liquidity to an existing position:

1. Find your position in the "My Positions" tab
2. Click the "Add" button next to the position
3. Follow the same process as adding liquidity for the first time

Removing Liquidity

When you want to withdraw your liquidity:

1. Find your position in the "My Positions" tab
2. Click the "Remove" button next to the position
3. Specify how much of your liquidity you want to remove (partial or full)
4. Confirm the transaction in your wallet

When you remove liquidity, you'll receive back both tokens in the pair based on the current ratio in the pool, which may differ from your initial deposit due to price changes and impermanent loss.

Understanding Your Earnings

Trading Fees

As a liquidity provider, you earn a share of the trading fees generated by the pool. On DiviSwap, this is typically 0.3% of all trades, distributed proportionally to all liquidity providers based on their share of the pool.

These fees are automatically added to the pool, increasing the value of your LP tokens over time. When you withdraw your liquidity, you'll receive your share of these accumulated fees.

Calculating Returns

To estimate your returns from providing liquidity:

1. Calculate your share of the pool (your LP tokens divided by total LP tokens)
2. Estimate the daily/weekly/monthly trading volume for the pool
3. Multiply the trading volume by the fee percentage (0.3%) to get total fees
4. Multiply total fees by your pool share to get your fee earnings

Remember to factor in potential impermanent loss when calculating your overall returns.

Best Practices for Liquidity Providers

Choose Your Pools Wisely

Not all liquidity pools are created equal. Consider these factors when choosing pools:

• Trading Volume: Higher volume means more fees
• Price Stability: Pairs with stable price relationships have lower impermanent loss risk
• Token Fundamentals: Ensure you're comfortable holding both tokens long-term
• Pool Size: Smaller pools may offer higher percentage returns but with higher risk

Monitor Your Positions

Liquidity provision isn't a "set and forget" strategy:

• Regularly check your positions to assess performance
• Be aware of price changes between the paired tokens
• Consider removing liquidity if impermanent loss becomes significant
• Stay informed about updates or changes to the DiviSwap protocol

Diversify Your Liquidity

Just as with other investments, diversification can help manage risk:

• Consider providing liquidity across multiple pools
• Mix stable pairs (lower risk, lower return) with volatile pairs (higher risk, potentially higher return)
• Don't commit all your assets to liquidity provision

Troubleshooting Common Issues

Transaction Failed

If your transaction fails, it could be due to:

• Insufficient Gas: Try increasing your gas limit or gas price
• Price Impact Too High: For new pools, try adding smaller amounts of liquidity
• Slippage Tolerance: In volatile markets, you may need to increase your slippage tolerance
• Insufficient Balance: Ensure you have enough of both tokens plus extra CHZ for gas fees

LP Tokens Not Showing

If you don't see your LP tokens after adding liquidity:

• Refresh the page and check the "My Positions" tab again
• Verify that the transaction was confirmed on the blockchain
• Check if your wallet is connected to the correct network (Chiliz Chain)

Unable to Remove Liquidity

If you're having trouble removing liquidity:

• Ensure you have enough CHZ for gas fees
• Try removing a smaller amount first
• Check if there are any network congestion issues

Conclusion

Providing liquidity on DiviSwap is a great way to put your crypto assets to work and earn passive income through trading fees. While it comes with risks like impermanent loss, understanding these risks and following best practices can help you make informed decisions.

As you become more comfortable with liquidity provision, you can explore more advanced strategies like concentrated liquidity or multi-pool positions. The DeFi ecosystem continues to evolve, offering new opportunities for liquidity providers to optimize their returns.