Welcome to the Defi Kingdoms Gardens guide. In this section, we will go over how the Liquidity Pool gardens work and how what the numbers represent. We will also talk a little bit about the risks of investing in this.
What is a Liquidity Pool?
A liquidity pool can be thought of as a pot of cryptocurrency assets locked within a smart contract, which can be used for exchanges, loans and other applications. –finextra.com
This pool provides the pair of currency to always have liquid assets to help traders or investors be able to buy/sell between the two currencies without any issues. In return, you get a certain percentage of the transaction fees generated for providing the liquidity. They call this the Automated Market Maker (AMM) or Liquidity Pool Provider.
In DeFi, traders provide liquidity to Decentralised Exchanges (DEXs). That is what Defi Kingdoms does in their gardens. Currently, the game provides for the current cryptocurrency pairs in their gardens:
- JEWEL-ONE (most popular)
Total Value Locked (TVL) – This tells you how much money is locked in the pools in total. This will fluctuate as price of jewel changes.
How To Buy Seed for a Specific Pool
In this section, we will go over how to provide liquidity for the JEWEL-ONE pool. Since this is the main trading pair for the game, it has a high chance their price moves relatively close to each other, hence reducing the chance of impermanent loss, which will be explained in the next section.
Step 1: Buy ONE (Harmony) from Binance, Gate.io, Kucoin, Huobi, or Crypto.com
This will depend on where you live. Most people can use Binance or Crypto.com. Some US residents are restricted to certain centralized exchanges. I have listed some videos to help guide you through the process.
Step 2: Transfer Them to Metamask or your preferred Digital Wallet
In order for your Harmony (ONE) to show up on your Metamask, you need to first add the network to Metamask.
Here is the official link to how to do so: https://docs.harmony.one/home/network/wallets/browser-extensions-wallets/metamask-wallet/adding-harmony
Next, you want to go to https://explorer.harmony.one/. Put in your Metamask address located on the top. It will convert that address into the Harmony version. You will need that address to transfer your Harmony to your Metamask. You will know you have the correct address when it starts with oneXXXXXXXX.
Step 3: Connect to Defi Kingdoms and Go to Marketplace Section
Step 4: Convert 49.5% ONE into JEWEL (keep 0.5% ONE for transaction fees)
If you click to the trader, it will tell you how much ONE you have that you can convert to other currencies. In this example, we will be converting to JEWEL. There is a convenient 50% button you can use so you don’t have to do the math.
Step 5: Go to Druid and Add Seeds
Step 6: Go to Gardens and Deposit into the JEWEL-ONE pool
Risks of Liquidity Pools
Just like stocks and forex, the liquidity pools also carries their own risk. The biggest risk of providing in the liquidity pools is impermanent loss.
Impermanent loss happens when you provide liquidity to a liquidity pool, and the price of your deposited assets changes compared to when you deposited them. The bigger this change is, the more you are exposed to impermanent loss. In this case, the loss means less dollar value at the time of withdrawal than at the time of deposit. –Binance Academy
For example (simplified with easy numbers):
- I stake 1 JEWEL and 100 ONE in the respective pool on Defi Kingdoms JEWEL-ONE Garden
- In a week 1 JEWEL is equal to 200 ONE
- If I held my initial 1 JEWEL and 100 ONE, I would have gained 50% (100 ONE is the same, but my JEWEL is now worth 200 ONE)
- Being an AMM in the JEWEL-ONE pool on Defi Kingdoms, my gain is less than the 50% of what I would have made if I simply held both assets
The APR helps offset some of the risk. As long as both prices of the asset does not diverge and go opposite ways, the impermanent loss will be minimal. It is called that because the loss is not realized unless the stake is withdrawn. If JEWEL goes back to 100 ONE, and I withdraw my funds, then there wouldn’t be any impermanent loss.
Below are a few calculators to help you visualize the gain and losses:
White Board Crypto has a video that gives you a good idea on how to use it with 3 versions:
The other risk is the price of both your assets go down. Both your currencies lose value and your overall LP token loses their value. This is the same as buying a stock and it goes down. However, the saving grace is that you will be earning a yield while your asset value decreases, thus minimizing your losses a bit. It is similar to buying a stock that pays dividends but their stock price went down.
Click here to go to the beginners guide.