The Most Reliable DeFi: Profitability of Tezos Liquidity Baking Calculated

The Most Reliable DeFi: Profitability of Tezos Liquidity Baking Calculated

Disclaimer: This text is not investment advice or instruction for trading. Tezos Ukraine bears no responsibility for your investment decisions. Never invest more than you can afford to lose.

Is investing in liquidity baking worth it? We calculated it!

Here’s to show how liquidity baking works, how much you can earn from it, and what’s more profitable: tez/tzBTC or other pools?

What is liquidity baking?

Liquidity baking is the innovation found in Granada. The developers created a smart contract where users deposit tzBTC and tez in exchange for LP tokens that represent their share.

For instance, users have pooled $40k in tzBTC and as much in tez. For that they got 80 LP tokens, i.e. one token per thousand of dollars. Then you deposit $10k tzBTC and as much in tez, and therefore get 20 LP tokens. Your tokens represent 20% of the entire share, so now you can exchange them for 20% of the pool’s assets at any moment.

When a new block is created, the Tezos protocol adds 2.5 tez to the pool. The pool expands but the number of LP tokens remains the same. Say, after you had invested in it, the protocol added $10k worth of tez to the pool. The overall sum has grown to $110k. You redeem LP tokens and get your 20%, which is now $22k.

How much can you earn from liquidity baking?

A 2.5 tez reward looks negligible but liquidity baking participants will make 7.2k tez in a day, and 2.6m tez in a year. For comparison, Tezos network validators, i.e. bakers, get only 42m tez a year.

At the time of writing, Tezos users have pooled $7.7m. If you own 1% of this sum ($77k), you will make 26k tez in a year. At the price of $3.7 it is $98k or 127% APY.

How much you actually make from liquidity baking directly depends on the percentage of your share in the pool.

Daily profit of liquidity baking

Annual yield percentage depends on how much is your share in the liquidity pool.

APY of liquidity baking

In real life, the profit may be a few percent higher. The number of tez in the pool is continuously growing, so tzBTC grows more expensive against BTC. Users will find it profitable to sell tzBTC for tez to balance out the pool. The trading fees will go to the pool and therefore increase the participants’ profits.

How to deposit funds in the liquidity pool

Liquidity baking doesn’t have a native app so far. The best way to deposit your funds in a pool for now is through the blockchain explorer TzKT.io.

First you buy tzBTC at a decentralised exchange and deposit tzBTC and tez with equal market price in the pool. Make sure you have enough tokens to deposit the desired amount of funds.

Then go to the liquidity baking page at TzKT.io. In the lower right corner, go to the ADD LIQUIDITY tab, link your wallet, specify the number of tokens and click Add Liquidity.

The liquidity baking page at TzKT.io

Confirm the transaction and wait until LP tokens arrive at your wallet. Congratulations, you have added liquidity and started earning tez!

In order to take your profits, go to REMOVE LIQUIDITY, specify the number of LP tokens subject to exchange, and click Remove Liquidity.

In order to take your profits, go to REMOVE LIQUIDITY, specify the number of LP tokens subject to exchange, and click Remove Liquidity

Liquidity baking is the most reliable DeFi on Tezos

DeFi projects have a common drawback, which is inflation. The project assigns awards in its own tokens that it prints out of thin air. When demand inevitably drops, tokens will become cheaper, and the real profitability of investment will decrease.

Liquidity baking is free from drawbacks like this one as pool members get their rewards in tez. There is always demand from it, therefore the investment is more reliable than those in other DeFi projects on Tezos.

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