How to Provide Liquidity to THORChain?

9 min readMay 17, 2021

A liquidity provider (LP) is an individual who deposits their assets into liquidity pools. Traders will use these liquidity pools to swap their assets. By providing liquidity for traders, you will earn yield on your assets from trading fees, incentives, and block rewards.

Impermanent Loss Protection (ILP)
Liquidity Providers will receive linear IL protection for 100 days. Essentially this means you are adding 1% protection for every day that you provide liquidity.

49 days provided = 49% IL protection,
100 days = 100% IL protection.

we will talk more in-depth about ILP later.

Native Assets
The pools use native assets on their native chain. i.e deposit native BTC into the RUNE-BTC liquidity pool to earn yield (see examples of pools below).

For every deposit, there must be an equal proportion of RUNE paired with the ASSET. Every liquidity pool will equate to 50% RUNE and 50% ASSET.

i.e if you deposit $20,000 ETH then it must be paired with $20,000 RUNE, or the pool will rebalance your deposit into a 50:50 split equating to $10,000 ETH and $10,000 RUNE.

Remember when providing liquidity this means you will be exposed to both RUNE and ASSET.

Asym or Sym?

Liquidity providers can deposits assets in two ways: Asymmetrically or Symmetrically.

Asymmetrical Deposit is when you pool one-sided with an asset. You are depositing an unequal proportion of ASSET in an equal paired liquidity pool, hence why it is asymmetrical. When you pool asymmetrically your ASSET is converted into 50% RUNE and 50% ASSET (this is called rebalancing).

If you deposit asymetrically you can only withdraw assymetrically.

As shown, a user deposits 100% BTC. The pool will rebalance their assets to convert them into 50% RUNE and 50% BTC.

You can also pool asymmetrically with RUNE. Same principle, your 100% RUNE will be converted into 50% RUNE and 50% ASSET. Essentially you are selling half your RUNE for said asset.

Keep in mind that you are now exposed to both assets.

When your deposit is rebalanced, you are subject to slippage and fees when entering the pool.

Due to slippage, the total rebalance value of the deposit will not be exactly 100% of the total value of the initial deposit. Slippage is due to the depth of liquidity pools, the deeper the pools (aka the more liquidity) the less slippage occurs and the amount you will receive will be closer to the initial deposit.

Slippage also depends on the size of the deposit. Bigger deposits occur more slippage. Always take into account slippage for your asymmetrical deposits.

If you asymmetrically deposit into an empty or shallow pool, you may potentially LOSE all of your ASSETS. Basically, you unbalance the pool to such an extreme that an arbitrager can pay peanuts for the asset you deposited. As the arbitrager is enticed to balance the pool.

There are 3 types charged on asymmetrical deposits:
1. The on-chain deposit transaction fee (inbound tx)
2. The liquidity fee as a function of slip
3. The on-chain redemption transaction fee (outbound tx)

There is no difference between swapping into a symmetrical proportion of asset, then depositing that, as you still experience the same net slip as if you were depositing asymmetrically.

IL Protection is applied to the asymmetrical deposit after it has been rebalanced into a symmetrical deposit.

LP vs Hold is calculated when assets have been rebalanced into a symmetrical deposit.

Symmetrical deposits are when users deposit an equal value of RUNE and ASSET.

If you deposit symetrically you can withdraw both symmetrically or asymetrically.

As shown, a user deposits 50% BTC and 50% RUNE into the BTC-RUNE liquidity pool.

As the deposit is already balanced, the pool does not need to rebalance your deposit.

If you already have RUNE and another ASSET it may be wise to provide liquidity because with IL Protection you will always be better off providing liquidity than just hodling.

Your IL Protection will start from when the pool confirms your deposit.

Withdrawal Deposits

Liquidity providers can withdraw their assets at any time, there is no lock-up period.

For every withdrawal whether it is an asymmetrical or symmetrical deposit, there is always a fee to be paid in native RUNE to withdraw funds from the pool.

BUT, for NON-RUNE asymmetrical deposit, the withdrawal fee will be native to the asset when withdrawing the asset asymmetrically.

i.e when withdrawing an asymmetrical BTC deposit you will have to pay a withdrawal fee in BTC.

Why ASYM or SYM?

There are many reasons why a user would use different methods of depositing assets. Sometimes it due to the flexibility of the protocol and sometimes it’s a choice. There are LP strategies to accumulate more RUNE or ASSET depending on how users deposit their assets, to find out more join LP University.

Sym deposits have more withdrawal options, you can withdraw your deposit asymmetrically and symmetrically. Whereas for Asym deposits you can only withdraw asymmetrically.

This depends on your country’s legislation and the position a taxpayer takes. However, when adding liquidity asymmetrically it can be considered either a taxable event on half your position or a none taxable event because you do not swap assets before adding them to the pool. It becomes a taxable event when you withdraw your deposit.

If you were bullish on RUNE and another ASSET, but you do not own the other ASSET. You could simply asymmetrically deposit RUNE to acquire the ASSET, as you will be essentially selling half your rune for the asset. Likewise, if you only owned the ASSET and no RUNE (which is a sin) but you wanted to acquire RUNE, then you could deposit your ASSET asymmetrically.

Before you deposit you need to understand that the pool is essentially an auto-balancing portfolio. The liquidity pool’s goal is to maintain an equal proportion of RUNE and ASSET relative to the dollar value. If you deposit and then RUNE skyrockets in price, then the pool will auto-balance itself by selling RUNE for the ASSET, therefore you would acquire more ASSET but less RUNE. Likewise, you would acquire more RUNE if the ASSET pumps. However, with IL protection it is guaranteed that after 100 days the user will always be better of LP’ing rather than just holding both assets.

We know this has been repeated but we need to stress this….

“keep in mind you are exposed to price fluctuations of both assets”

Impermanent Loss Protection (ILP)

IL, in short, is when one of your assets appreciates or depreciates relative to the other asset, it opens up an arbitrary opportunity for others to profit from because they are incentivised to equal the pools.

ILP guarantees that you will ALWAYS be better of providing liquidity with your portfolio rather than just hodling RUNE and ASSET in your wallet.

You are putting your vacant assets to work so are rewarded in due course!

ILP is paid out when you withdraw your deposit from the liquidity pool. If the impermanent loss is greater than the revenue you have earned from providing liquidity (from fees and incentives) then you will be subsidised the difference.

i.e if you earn enough from fees and incentives to cover your impermanent loss then this revenue will be used to subsidise your protection. If it doesn’t then THORChain will subsidise your IL.

ILP does NOT protect you from both assets depreciating! This is loss, as this would occur if you were just holding anyways.

Liquidity Providers will receive linear IL protection over the course of 100 days. Essentially this means you are adding 1% protection for every day that you provide liquidity.

49 days provided = 49% IL protection,
100 days = 100% IL protection.

After 100 days+, your pool will be fully protected until you withdraw from it!

Thorchain believes that the revenue from LP’ing will consistently exceed impermanent loss so it will be rare for THORChain to subsidise your loss as the pools will generate enough revenue to cover it.

All deposits will be covered as if they are symmetrical deposits. IL Protection is applied to the asymmetrical deposits after it has been rebalanced into a symmetrical deposit.

Let says you have already provided liquidity, if you top up your LP with an additional deposit it would RESET your overall IL Protection to the date of the new deposit. The IL Protection will be tracked from the most recent deposit and every time you add a new deposit the days of IL protection will restart for your whole pool. So in order to get 100% ILP, you will have to wait 100 days from your most recent deposit.

If your deposit transaction takes a while to process aka if the chain of the asset you are provided is congested like BTC or ETH, you may suffer IL whilst your asset transaction is pending because the deposit can only be protected when it has been confirmed and added to the pool. This also goes for pending liquidity pools that have not been granted as an active pool, as your assets are in a pending pool that is “inactive”.

Partial withdraws — taking out a percentage of your pool but not all of it. This will not reset the ILP of your pool.

Grassroots Crypto does a great explanation on ILP, check out his video!

How to add LIQUIDITY?

Adding symmetrically:

You will need to upgrade your BNB.RUNE or ETH.RUNE to THOR.RUNE (native) — For detailed steps on how to upgrade your RUNE click here.

Adding RUNE Asymmetrically:

Adding ASSET Asymmetrically:

You will need the native asset to pay gas for the deposit transaction.
i.e depositing ETH, you will need additional ETH to pay for gas.

Expert Mode
You will have to enable expert mode!

It allows you to pool 2-sided assets asymmetrically
i.e 2 BTC + 1000 RUNE as shown below

However, you might experience slippage due to rebalancing from depositing asymmetrically.

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