# Liquidity

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In addition to swapping tokens, NeuraSwap users can also add liquidity to the DEX itself by contributing equal amounts of two tokens (a token pair) to create liquidity provider (LP) tokens.

#### How Liquidity Pools Work <a href="#how-liquidity-pools-work" id="how-liquidity-pools-work"></a>

Liquidity pools are created by pairing together two different crypto tokens and depositing them into a smart contract. NeuraSwap currently uses the constant product formula for our automated market market (AMM) and liquidity pools, ensuring that assets are always deposited in an equal 50/50 split based on the current value of those assets, and that all liquidity pools only ever have two tokens in them.

Liquidity pools are often referred to as "trading pairs," because you are combining two tokens to create a liquidity provider token. A liquidity pool of two assets allows you to swap (trade) between those two tokens.&#x20;

Additionally, if you want to dig deeper on the math behind our AMM (the constant product formula) check out Binance's walkthrough [here](https://academy.binance.com/en/articles/what-is-an-automated-market-maker-amm).

**Creating Liquidity Provider Tokens**

A liquidity provider token (aka "LP token") is essentially a receipt that a protocol provides to a user who adds liquidity to a decentralized exchange. NeuraSwap allows you to provide liquidity by adding your token pairs to liquidity pools, using equal amounts for each token.

When you add your tokens to a liquidity pool, you will receive AI-LPs - NeuraSwap's native liquidity provider tokens.

For example: if you deposited NEU and GPT into a liquidity pool, you would receive NEU-GPT AI-LP tokens.

The number of AI-LP tokens you receive represents your portion of the NEU-GPT liquidity pool. You can also redeem your funds at any time by removing your liquidity, but please be conscious of impermanent loss.

**Liquidity Provider Benefits**

There are two main ways that you can earn rewards after adding liquidity. As soon as a user creates an AI-LP token and holds it in their wallet, they begin collecting trading fees (aka Liquidity Mining). When transactions occur on the DEX that involve the tokens represented by a particular AI-LP token, fees collected on those transactions are distributed proportionally among the holders of the applicable LP tokens.

{% hint style="info" %}
**NOTE**: Liquidity provider tokens are native to a particular DEX and cannot be used to earn trading fees or staking rewards on other DEXs. Only LP tokens created on NeuraSwap (AI-LPs) can be used for liquidity mining on NeuraSwap.
{% endhint %}

**Liquidity Mining**

Any time someone swaps between a token pair on NeuraSwap’s DEX that is routed through AI LPs, a 0.20% trading fee is collected.

For trades on **GPT Chain**: Of the 0.20% trading fee, 0.05% goes to the NeuraSwap Treasury, and the remaining 0.15% is distributed proportionally to all holders of the applicable AI-LP token.

Keep in mind that theses trading fees are only distributed to V3 token holders when the relative token price is within the price range that they set when setting up the position.

{% hint style="info" %}
**NOTE:** Trading fees are earned on AI-LPs that are held in your wallet AND on those that are staked in Yield Farms. You do not have to unstake AI-LPs from Yield Farms in order to earn trading fees.
{% endhint %}

**Impermanent Loss**

Providing liquidity is not without risk, as you may be exposed to impermanent loss.[ “Simply put, impermanent loss is the difference between holding tokens in an AMM and holding them in your wallet.” - Nate Hindman](https://blog.bancor.network/beginners-guide-to-getting-rekt-by-impermanent-loss-7c9510cb2f22)

{% hint style="info" %}
What if I deposit unequal amounts into a liquidity pool? Creating a liquidity pool with unequal amounts of two tokens opens users up to "impermanent loss." If the price of the tokens offset from each another by a significant amount, LP holders could get a lesser return compared to staking each token separately. To reduce the risk of impermanent loss, LP holders are suggested to split their liquidity in half between the two tokens.
{% endhint %}

Check out Binance Academy's [detailed walkthrough](https://academy.binance.com/en/articles/impermanent-loss-explained) on impermanent loss to learn more:

Continue to the [How to Add Liquidity](liquidity/how-to-add-liquidity) page for a detailed walkthrough.
