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How to Earn Perpetual DEX LP Yield: A Step-by-Step Guide
by ChaseFebruary 15th, 2024
Too Long; Didn't Read
DeFi is rich with yield farming opportunities. In particular, the perp DEX narrative is driving some of the highest liquidity provider (LP) yields currently being offered on the market. This article offers a step-by-step guide to earning perp DEX LP yield.
Before we go into the nitty-gritty, it is imperative that we understand the sources of LP yield. On a centralized exchange, liquidity is usually provided by the exchange’s order book of bids and asks.
On the other hand, on-chain LP-based perpetual DEXs use smart contracts to facilitate trading without the need for intermediaries. Such DEXs require LPs to deposit assets into the platforms’ liquidity pools — to grow their total value locked (TVL) and support large order sizes.
As a result, perpetual DEXs compete to attract liquidity. Most popularly, these DEXs go down the incentives route by sharing a cut of their platform fees with LPs; this is called ‘real yield.’ Often, they too supply additional staking rewards to boost yield. All in all, this results in double-digit to triple-digit annual percentage yields (APY).
If this sounds interesting, let’s get started.
1. Create a Non-Custodial Wallet
Unlike centralized exchanges, perpetual DEXs do not utilize platform wallets (hot wallets) that give the platform control over your funds. Use a non-custodial wallet like
A non-custodial wallet gives you control over your own funds and is necessary to provide liquidity on perpetual DEXs and start earning yield.
2. Select a Perpetual DEX That Offers LP Yield
For the purposes of this article, we’ll use
APX Finance’s
From the image, the ALP pool is made up of mostly stablecoins (over 75%) — USDT and USDC. The remaining quarter is taken up by blue-chips like Bitcoin, Ether, and BNB. At the time of writing, the total APR hovers around 56%.
3. Mint LP Tokens
For the uninitiated, depositing assets into a perpetual DEX liquidity pool gives you LP tokens in return. Similarly, on APX Finance, depositing assets into ALP gives you ALP tokens. Note that LP tokens are not like normal cryptocurrencies; they function as a reward mechanism.
To mint ALP, connect your wallet to APX Finance and navigate to the ALP page. Click ‘Buy ALP’, and choose your preferred asset and amount. You’ll see the estimated number of ALP you will get and the fees required.
On APX Finance, APY consists of Fee APY and Stake APY. Fee APY is funded from 50% of platform fees and contributes directly to ALP’s net asset value. Stake APY is distributed in the platform’s native token (APX) and adds to the total APY. Once confirmed, click to mint the tokens.
And voila! Your LP tokens are minted! You are now contributing liquidity to APX Finance and earning yield. This process is highly similar to other perpetual DEXs as well.
4. Stake Your LP Tokens (Optional)
On APX, you can select to automatically stake your ALP tokens immediately after minting them.
While exchanges like APX Finance provide additional staking rewards, note that this is not uniform across the board.
Summing It Up
Liquidity pools on perpetual DEXs are the backbone of on-chain perpetual trading and generally offer high yields with low risks. You can easily provide liquidity and start earning yield with a decentralized wallet and some stablecoins.
However, it is always paramount to understand the risks involved. In on-chain liquidity models, the pool is the counterparty of traders. The pool profits when traders lose, and vice versa. As an LP, your investment may be affected when traders on the platform are profiting.
Hence, understand your risk appetite well and never put in more than you can afford to lose. This applies to all kinds of financial instruments in DeFi and even in traditional finance.
L O A D I N G
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