Liquidity Providers
Liquidity providers are essential for the overall health of the protocol. By providing capital in the form of assets, liquidity providers contribute towards a fundamental function of the exchange - trading. To incentivise deep liquidity across the platform, liquidity providers are programmatically compensated with rewards in exchange for their services.
On Beethoven X, Liquidity Providers can earn interest from two sources: Swap Fees, and Interest Bearing Yield.
Swap Fees
Anytime a trade takes place on the DEX, the pool that was used to facilitate the trade collects swap fees. This fee is shared amongst Liquidity Providers and the treasury. The swap fee differs from pool to pool depending on the pool type and the underlying assets. Liquidity Providers automatically earn swap fees without having to claim any rewards.
How does it work?
Upon investing in a liquidity pool, users receive Beethoven X Pool Tokens (BPTs) that represent their share of the pool. Over time, the pool collects swap fees from traders, and these fees are reinvested into the pool. The Liquidity Providers’ share of the pool stays the same (BPTs), but the value of the pool increases due to the collection of fees.
Swap fees are a key source of yield for liquidity providers. This yield is automatically reinvested into the pool and users never need to harvest these rewards, instead, the value of the pool will increase.
Let’s give an example
Alice, Bob, Chuck, and Diana all invest in the same liquidity pool. The total value of liquidity provided is worth $100. Over time, the pool collects fees from traders swapping in and out of assets within the pool. Due to the culmination of swap fees reinvested back into the pool, the value of the pool has now grown to $200. Each user’s share of the pool has stayed the same, but their initial investment value has increased.
| Person | Share of Pool | Initial Value | Value after fees |
|---|---|---|---|
| Alice | 50% | $50 | $100 |
| Bob | 25% | $25 | $50 |
| Chuck | 12.5% | $12.50 | $25 |
| Diana | 12.5% | $12.50 | $25 |
Interest Bearing Yield
Interest Bearing (IB) assets are those that continually increase in value due to an underlying yield generation mechanism. Tokens such as wstETH, rETH, and sFTMx are all examples of IB staking derivatives that accrue in value due to the underlying staking rewards.
Staking derivatives are not the only source of interest bearing tokens, in fact any token that has been deposited into another yield-generating mechanism and is accruing value is subsequently interest-bearing. Boosted Pools are a great example of this.
Liquidity providers that are exposed to these interest bearing tokens on the protocol receive an additional source of revenue in the form of interest bearing yield on top of swap fees. Any interest bearing yield naturally accrues within the token, and just like swap fees, users do not need to claim any rewards.