What Is Binance Liquidity Farming? Best Way to Explain

Posted On March 4, 2023

Binance Liquidity Farming is a liquidity pool developed based on the AMM (Automatic Market Maker) principle. Just like any other DeFi swap, it consists of different liquidity pools, and each liquidity pool contains two digital tokens.

You can provide liquidity in the pools to become a liquidity provider and earn transaction fees and BNB rewards. Also, you can swap two digital tokens in the liquidity pools easily but always note that Liquidity Farming supports API functionality.

How many types of products does Binance Liquidity Farming support?

There are two types of Liquidity Farming – Stable and Innovative.

• Stable: Developed with a hybrid constant function automatic market-making system model to realize the transaction and pricing between two stable tokens, and provide a low slippage trading experience. The prices of the two tokens in the pool are affected by exchange rate/token price fluctuations, and the rewards for liquidity providers are more stable than the Innovative products.
• Innovative: Developed with a constant mean value automatic market-making system model to achieve transaction and pricing for two digital tokens. The prices of the two tokens in the pool are affected by the exchange rate/token price fluctuations, and rewards for liquidity providers fluctuate more greatly.

some definitions you should know About Liquidity Farming

• Current pool size: The composition of the pair in the current pool. When you add assets, you will also add them in proportion to the composition.
• Add: Provide liquidity for the liquidity pools.
• Remove: Remove your tokens from the liquidity pools.
• Price: The swap price between the pair in the pool. The final price depends on the proportion of the pair in the liquidity pool and is calculated by a formula.
• Portion: The pool portion you are expected to get after adding liquidity.
• Portion of the pool: The estimated share of the pool that you are expected to get after adding liquidity.
• Slippage: The estimated percentage that the ultimate executed price of the swap deviates from the current price due to the trading amount.
• Total yield: The estimated annualized yield a user can expect to receive for providing liquidity in this pool.
• My Portion: Once you add liquidity to a liquidity pool, you will get a portion that is different from the single token you added. The portion is composed of two digital tokens. The number of the two digital tokens will change in real-time based on the current pool size.
• Total Yield: The latest reference rate of return for the trading pair.
• Portion Amount: The amount of token in the acquired portion.
• Portion Value: The total value of the portion acquired after adding assets.
• Pool Portion Composition: Current composites of your portion. The number of the two tokens will change in real-time based on the current pool size.
• Cost per Portion: Calculated based on the cost per portion when you add liquidity, priced in USD.
• Portion Value PNL: Calculated based on the current portion value minus the total cost of the portion, priced in USD. Portion value is affected by multiple factors, including exchange rates, token price fluctuations, and impermanent losses, which can generate positive or negative returns.
• Earnings: Includes the Liquidity Farming fee income and BNB rewards, priced in USD

How is the total yield calculated?

• Total yield = 365 * (BNB Rewards Distributed in the Past 24 Hours + Trading Fee Rewards in Past 24 hours) / Total Pool Value in the Past 24 Hours

How is the portion value calculated?

• Portion value = The Number of Two Tokens in the Portion Composition * Real-Time Exchange Rates, Denominated in USD.

Example:

User’s portion value = 100 USDT + 50 DAI

Real-time exchange rate: 1 USDT = 1.005 USD

1 DAI = 1.01 USD

Portion value = 100 USDT * 1.005 + 50 DAI * 1.01 = 151 USD

Where do you collect trading fees?

Trading fees are collected when investors:

• Make a swap in [Trade] – [Swap Farming];
• Add a single token on [Earn] – [Liquidity Farming] – [Add];
• Redeem a single token on [Earn] – [Liquidity Farming] – [Redeem].