Exciting news for all APY fans.

We’re now boosting the two auto-compounding POTS LP vaults on Beefy Finance — the yield optimizing platform that acts as a parent project to Moonpot.

We will be doing so for the next week (until 07:00 UTC on 11 Sep). This means you can earn a massive 424% APY on your deposited LP tokens — APY correct at the time of writing.

Sounds great, right?! You can follow our handy How To Guide here if you want in. But hey, Cadet, let’s slow it down a bit — do you even know what any of that means?

We think it’s important you have a full understanding of what you’re getting into before rushing to put your assets down.

And so, in this edition of Moon Academy, we look at exactly what all the above means so you can make an informed decision before participating…

Class is now in session.

Liquidity Pools

The best place to start is always at the beginning. And for us, that means liquidity pools.

There are two main places to buy Moonpot’s POTS token right now. One is on PancakeSwap. The other is on ApeSwap.

As you no doubt know, both of these platforms are decentralized exchanges (DEX) where you can go to buy and sell crypto tokens without a central authority.

These particular DEXs are known as automated market makers.

What that means is there’s no order book or need for someone else to be on the other side of your trade. Rather, there is what’s called a ‘liquidity pool’ where users go to buy/sell their tokens.

You can think of it as a massive pile of two tokens that together make up a market and provide the liquidity needed for decentralized trading.

So, on PancakeSwap, there is a POTS-BUSD liquidity pool. This means anyone can buy or sell either of those tokens for the other.

Essentially you put in BUSD and then take out POTS, or vice versa. The smart contract’s algorithms then automate the running and rebalancing of the pool.

On ApeSwap, meanwhile, there is a POTS-BNB liquidity pool, so a big pile of those two tokens, which allows anyone to trade either side of that particular pair. Again, all automated.

Liquidity Providers

If there is no central authority then there is no market maker. So where do all the assets come from to provide the liquidity in the pool? Well, from absolutely anyone who wants to take part.

All you have to do is go to the platform you want to provide liquidity to and deposit the two tokens that make up that pool.

So, in the case of ApeSwap (and its POTS-BNB liquidity pool), you would deposit some POTS tokens and some BNB tokens.

Note that when providing liquidity the USD amount of each token has to be the same so the pool remains balanced.

Congratulations: you are now a Liquidity Provider.

But why would you want to do this? Well, for money of course. Because anyone who provides liquidity to a pool earns a share of the total trading fees (proportional to their share of the pool).

Every time a user makes a trade from the pool they have to pay a small fee. And that money is then paid to all the liquidity providers as a reward for staking their tokens in the first place.

The way this is tracked is by giving everyone who provides liquidity a new token to represent their deposit. This is what’s known as a Liquidity Provider token, or Liquidity Pool token.

You can just call them LP tokens.

LP Tokens

Let’s get more specific. Especially as we have real examples to focus on.

As mentioned, PancakeSwap has a POTS-BUSD liquidity pool. So you would deposit an equal USD amount of both tokens and receive liquidity pool tokens called POTS-BUSD LP. These tokens represent your deposit, and portion of the pool.

They’re incredibly important because they:

(a) mark ownership of the POTS and BUSD you have deposited into the liquidity pool

(b) give you the right to remove your POTS and BUSD from the pool at any time

(c) are how you are awarded your proportional share of the trading fees from that particular pool

In the case of ApeSwap you will be staking POTS and BNB in their liquidity pool, and receiving POTS-BNB LP tokens as a way of marking your deposit and earning from fees.

Note that ApeSwap likes to call its LP tokens ‘APE-LP tokens’, or ALP — just so you know.

Staking Your LP Tokens

This is where things get even more interesting.

The fact you’re a liquidity provider means you have staked two different assets on a DEX, such as PancakeSwap or ApeSwap, and are earning passive income from trading fees.

But you have also received another token as a kind of receipt — your LP tokens. Since these are tokens in their own right you can use them on other DeFi platforms, such as Beefy Finance.

This is a good idea because Beefy Finance acts as a yield optimizer, which means you’ll earn an even higher APY from your LP Tokens earnings.

How so? Well, to take profits from the pool you have to cash out your LP Tokens to receive your share. But then to start earning again you need to restake everything. What Beefy does in the most basic of terms is automatically reinvest your pool earnings.

This saves you time, effort, and fees.

All you have to do is stake your POTS-BNB LP tokens in Beefy’s POTS-BNB LP vault.

Or, if you have POTS-BUSD LP tokens then you deposit them in Beefy’s POTS-BUSD LP vault.

Either way, Beefy’s smart contracts will autocompound your liquidity pool earnings, which results in a higher APY than if you didn’t use your LP tokens on the Beefy platform.

Bonus POTS for Liquidity Providers

Normally that would be the end of the process.

But, as mentioned at the start of this edition of Moon Academy, we are currently boosting Beefy’s two POTS LP vaults as a reward for Cadets who have become liquidity providers.

Anyone who deposits their POTS LP tokens on Beefy can earn bonus POTS for doing so.

For clarity, when you deposit a token on Beefy the platform sends another token to your wallet as a way of tracking what you have staked and what earnings you should be receiving. You can think of it as another kind of receipt.

Anyone depositing POTS-BNB LP tokens on Beefy will receive something called mooApePOTS-BNB in return.

Anyone depositing POTS-BUSD LP tokens on Beefy will receive something called mooCakeV2POTS-BUSD in return.

They’re a bit like LP Tokens in that they exist as a form of accounting, and for you to be able to reclaim your deposited assets at any time. Usually, that’s it.

But until 11 September you can stake your mooApePOTS-BNB or mooCakeV2POTS-BUSD in Beefy’s Launchpool to receive bonus POTS courtesy of Moonpot.

You’re welcome, Cadet.

WARNING: Make Sure You Understand Impermanent Loss

There’s one last thing you really need to understand before you rush off to get POTS LP tokens and deposit them on Beefy. And that’s what they call impermanent loss.

Because becoming a liquidity provider opens you up to the possibility of losing value.

This is a complicated topic, but one you need to be aware of before staking.

In short, if the price of one or both of the tokens you’ve put in the pool makes a move, up or down, you risk your deposited assets being worth less than if you had simply held the tokens in your wallet.

A change in the price ratio of the two tokens will always lead to impermanent loss.

This is due to the underlying mechanism of how automated market makers work. You can learn more via Binance’s explanation here. Or Bancor’s blog here.

Given how much crypto prices move, impermanent loss is not uncommon. So why provide liquidity to the pools if you open yourself up to potential losses by doing so?

Because the trading fees you can earn as a result can more than make up for it.

But: not always. So remember, if the price of one of your assets in the pool changes significantly you may well lose out on gains you could have made from simply hodling.

It’s not easy to reach the Moon. Ziggy will always do his best to support you. But being a Cadet means studying for success. We hope this Moon Academy helps you, but make sure you do your own research.

You have been warned. There are no excuses to come crying to Mission Control about impermanent loss if you’ve not done your homework.

However, if you’re ready to embark on the LP mission and earn more than 400% APY on your tokens then check out our How To Guide here: