Liquidity on THORChain
Liquidity providers earn rewards in exchange for supplying their assets to the network.
Their assets are added to pools which swappers use to exchange assets. If you’d like to be a liquidity provider on THORChain, first, you need to use a compatible wallet (e.g. XDEFI Wallet) with your assets connected to an interface that will allow you to use THORChain (e.g. XDEFI Webapp). There is no KYC or permission process needed.
Liquidity providers can add liquidity to any of the active or pending pools. The ability to use and withdraw assets is completely non-custodial. Only the original depositor has the ability to withdraw them (based on the address used to deposit the assets).
Symmetrical and asymmetrical liquidity
When a depositor LP’s on THORChain, they are always exposed to two assets. For instance, because on THORChain all the pools are paired with RUNE, if a user deposits BTC to the BTC pool, this BTC value must be matched by the same dollar value of RUNE. The balanced 50% RUNE and 50% Asset manual entry are considered a symmetrical deposit, while anything else would be considered an asymmetrical deposit (i.e. depositing an asymmetrical ratio of BTC:RUNE).
A symmetrical deposit means that manually providing an equal value of both tokens to the liquidity pool at the same time. Remember, each symmetrical position includes a balanced amount of RUNE and the asset. In the example above, the RUNE-BTC position might be $1000 total. This means I deposited $500 worth of RUNE and $500 worth of BTC.
With symmetrical deposits, you can withdraw however you like, either 100% BTC or 100% RUNE, or withdraw symmetrically 50-50 of each asset.
Asymmetrically LP means manually entering the pool with only one type of asset. THORChain does allow a depositor to enter with only a single asset, but it should be noted in the example case above, half of the deposited BTC will still be converted to RUNE to keep the LP position balanced with both assets. Likewise, if one deposits RUNE only, half of it will be converted to BTC in this pool.
Asymmetrical LP will also have protection against impermanent loss; however, the protection provided by THORChain only takes into account the symmetrical position. So if you started with a deposit of 100 RUNE, your initial position will be counted as 50 RUNE and the equivalent amount of BTC when counting towards your 100% protected position. This is why calculating impermanent loss and LP vs. Hodl value for asymmetrical LP requires an understanding that you are still exposed to both assets. Impermanent Loss on THORChain is covered in full in a separate article.
Another detail about asymmetrical LPing is that only the asset deposited can be withdrawn. So, if a depositor provided BTC only, they will need to withdraw into BTC only (any RUNE earned would be converted to BTC during the withdrawal process). You may then swap into the desired amount of asset or RUNE once you have left the pool.
Benefits of providing liquidity
Every LP is entitled to a share of the block rewards (RUNE regularly emitted by the reserve) and the trading fees of the pool. Your earnings will be proportional to your pool share and are automatically compounded into your position in the pool.