When people talk about getting involved in defi, they’re often talking about farming in a liquidity pool. Farming is what motivates the investors to contribute to the pool. When an investor adds to a liquidity pool (see above), they are given a Liquidity Provider token (LP token) that represents a share of the pool. The more they add, the more LP tokens they have.
Going back to the liquidity pool, every time a trader swaps one token for the other, they pay a fee (just like with order books.) The difference is that here, the fee goes to the liquidity providers, or the investors who contributed to the pool. The fees are divided among the investors according to their share of the pool. They’re also called Liquidity Provider Rewards. The bigger your share of the pool, the more your rewards.
Adding your assets to a small pool may give you a bigger share of the reward. On the other hand, a smaller pool offers less liquidity and more slippage to traders, so it’s not as attractive.
Moving LP Tokens
These LP tokens have a value of their own. They entitle the holder to ongoing fees from other people’s trading. Projects like Creed allow investors to take their LP tokens and move them into Creed. This has the effect of moving the liquidity from Uniswap into a Creed pool. Investors get the benefits of sharing in trading fees on the new pool, and often there are incentives to switching to a new pool.
In addition to the rewards listed above, investors can also mine the new LP token during the initial period of launching a liquidity pools. The mining is a means to attract liquidity from other pools into the Creed pools.
Lending platforms with high APR generally take stable coin. ETH investment is possible but the APR is low.