We founded DeFi Land with the belief that decentralized technologies can change the world. Our platform is designed to be the most accessible on-ramp to the world of decentralized finance, allowing you to participate in token swaps, liquidity pools, and staking from the comfort of your own village. In addition to developing an amazing game, we want to help educate our players and offer new opportunities within the DeFi space. Among these opportunities is the launch of our brand-new LP staking feature, where we can take full control of rewarding our liquidity providers. Today, we will discuss how you can become a DFL-USDC liquidity provider and what this means for our ongoing efforts to provide strong liquidity and price stability for our token.
Single-Sided and LP Staking
In DeFi, staking broadly refers to locking tokens into smart contracts that offer incentives and utilities. Very often this can be translated to “I promise not to sell for a while if you give me an extra reward.” We now have two staking opportunities on our website: single-sided and LP staking. We launched Single-Sided Staking in early 2022 to ensure that early $DFL adopters received generous distributions of our unlocked token supplies. Single-sided staking continues to provide a high APY (still over 100% for 2-year stakes) for our holders. Single-sided staking is simple: our token holders can lock their tokens into a smart contract and earn a share of $DFL emissions. Players can choose to lock their tokens for a set period of time to earn even higher rewards.
You can read more about single-sided staking here.
LP staking is a way to reward liquidity providers who contribute to the DFL-USDC liquidity pool. When you provide liquidity to a token pair in a decentralized exchange, such as Raydium, you are essentially fortifying the price of the token. In the realm of DeFi, where most token swaps are performed on decentralized exchanges, liquidity is essential to achieving price stability. More liquidity means the $DFL token can handle larger trade volumes with smaller price fluctuations. Therefore, LP staking doesn’t just reward the person who says “I’m not going to sell.” It also rewards to the person who directly supports the health of the token.
Contributing to the DFL-USDC liquidity pool is a “smart contract” agreement, meaning anyone can participate and the agreement cannot be violated by you or the exchange. The agreement is simple: your tokens can be used to help users trade on the exchange, you make a percent gain on every transaction that uses the liquidity pool, and you can withdraw your tokens at any time. To take full advantage of being a liquidity provider for $DFL, you can contribute to the liquidity pool and stake your LP tokens. This can be done in two easy steps on our staking UI:
- Step One: Contribute liquidity to the DFL-USDC pool to create LP tokens. You will contribute $DFL and $USDC in equal value (USD), so make sure you have enough of both tokens in your wallet. In return, you will receive a number of LP tokens proportional to your contribution. LP tokens are a “receipt” of your transaction. Remember you can reclaim your contribution at any time.
- Step Two: Stake your LP tokens. This action is exactly the same as “single-sided staking” except now you are staking your LP tokens and not $DFL. You can choose fixed or flexible schedules based on your desired commitments and APY targets.
How are DeFi Land Liquidity Providers Rewarded?
A DeFi Land Liquidity Provider can earn two sets of rewards. You collect a distribution of the fees from the DFL-USDC liquidity pool on Raydium and you receive $DFL rewards directly from LP staking in DeFi Land. In other words, you are receiving two rewards because you are performing two actions: providing liquidity and staking your LP tokens.
Let’s break down these rewards:
- When you provide liquidity in our staking UI, you are contributing to the Raydium liquidity pool. On Raydium, liquidity providers receive 0.25% of each transaction, which comes from the fee paid by users who are swapping tokens. These fees are added back to the liquidity pool. This increases the value of your LP tokens.
- In DeFi Land, LP stakers are rewarded directly in $DFL. LP staking rewards are generated through fixed emissions from our dedicated rewards reserve. While this is technically inflationary, the benefit of having more liquidity certainly outweighs the small cost of emissions.
If you are familiar with our single-sided staking options, you will know that there are additional incentives beyond a fantastic APY. Stakers have priority in governance, future airdrops, NFT whitelists, and more. LP stakers will qualify for these same privileges.
Understanding Impermanent Loss
High APY, double rewards, benefiting the ecosystem. This has to be too good to be true, right? Of course, there are no investment strategies that are completely risk-free. Like any other investment, you are exposed to the gains and losses of the tokens. If the prices of the tokens in your liquidity pool increase in value, then the net value of your position increases. If the prices of the tokens decrease in value, then the net value of your position decreases. There is also the ominous term that you may have heard before, called Impermanent Loss.
What is impermanent loss? Impermanent Loss measures the disadvantage of participating in a liquidity pool instead of holding the tokens.
- Loss refers to the disadvantage of participating in the liquidity pool — sometimes you are “losing” or “missing out” by being locked into a liquidity pool.
- Impermanent refers to the fact that your “loss” can disappear if the tokens end up being priced at the same ratio at some point in the future.
Impermanent loss is complicated when you over-think it. We can simplify it with a golden rule: when the tokens diverge in price, you will always end up less exposed to the better performing token. This can hold back your gain and deepen your losses when the tokens diverge in value. When the tokens diverge significantly, it would have made more sense to have simply held the tokens outright. However, if the rewards you collect over time outweigh the impact of impermanent loss, you are still at an advantage investing in the liquidity pool. Take a look at an example:
Suppose DFL is trading for $0.002. To add $1000 worth of liquidity, you will provide 250,000 DFL and 500 USDC. If the price of DFL doubles to $0.004, you will end up with 176,776.70 DFL and $707.11. Your total quantity of DFL went down because they became more valuable. Your total contribution is now worth $1414.21. How is this loss? Well, had you simply held DFL and USDC outside of the liquidity pool, you would be worth $1500 ($1000 worth of DFL and $500 worth of USDC). Your impermanent loss is measured to be 5.72%. If you collect more than 5.72% worth of rewards, the impermanent loss is a moot point.
Can you avoid impermanent loss?
If your tokens diverge in value by any amount, you are susceptible to impermanent loss. Therefore, it is unavoidable for most token pairs. Remember, yield farmers do not dismiss LP staking as a strategy simply because of impermanent loss. Instead, they ask important questions to determine if a strategy is right for them.
- Will the risk of impermanent loss outweigh the fees earned from the liquidity pool?
- Are the additional LP staking rewards worth it?
- Do the underlying tokens in the liquidity pool represent projects with solid fundamentals?
- Does LP staking fit into my goal to have a diverse portfolio?
Want to learn more about DeFi Land? DeFi Land is a unique, multi-chain agriculture-simulation game created to gamify all aspects of decentralized finance. Our mission is to make it simple and easy for anyone to take part in the exciting world of DeFi and crypto. We recently introduced our Play and Earn gameplay, where our players can earn $GOLDY by fishing, harvesting, hunting, and tending to their pets using their Gen-0 NFTs. We have new players joining daily, and we welcome you to join us in Discord with any questions you have about getting started. You can also check out our socials here and join our Discord every Friday at 15:00 UTC for our Farmer’s Hall AMA with our team lead, DFL Erwin.