---
title: getting paid to provide liquidity to a small market
canonical_url: https://ensurance.app/guide/getting-paid-to-provide-liquidity-to-a-small-market
markdown_url: https://ensurance.app/guide/getting-paid-to-provide-liquidity-to-a-small-market.md
subtitle: the fee is the pay. the price move is the risk. a small pool makes both bigger
category: how-to
---

# getting paid to provide liquidity to a small market

*the fee is the pay. the price move is the risk. a small pool makes both bigger*

A liquidity provider puts two assets into a pool so other people can trade between them, and every trade pays a fee to the people whose assets are in the pool. That fee is the pay. In a small market, a modest trade can move the price a long way, and every trade still pays the fee. Both facts matter, and this post covers both.

Start with a river. The Mithi runs through Mumbai to the Arabian Sea, and when its banks, mangroves and channel can hold the monsoon, the neighbourhoods along it stay drier. The river does that work whether or not anyone trades anything. [**Ensurance**](https://ensurance.app/?from=guide) gives a place like that an account, the [Mithi River agent](/mithiriver.mumbai?from=guide), and instruments that people can buy and trade. Liquidity is what lets those instruments change hands without the price lurching every time someone does.

## what a liquidity provider earns

A pool holds two tokens, say a coin and the currency it trades against. A trader who wants the coin puts currency in and takes coin out. The pool's formula sets the price from the ratio of what it holds, and every swap pays the pool's fee on top. That fee goes to whoever holds a position in the pool, in proportion to their share.

So the money comes from **traders**. Not from a token printed to reward you, not from the protocol's treasury, not from the place. If nobody trades, a position earns nothing. If a lot of people trade, a position earns more. That is the whole income line.

On ensurance there are three different fees around a trade, and it helps to keep them apart:

| fee | who pays it | where it goes |
|---|---|---|
| **the coin's own pool fee** | a trader swapping a general ensurance coin in its launch pool | the coin's payout account, an agent account or a split |
| **the app fee** | a trader swapping through ensurance.app | 1% to Basin OpCo |
| **the liquidity provider fee** | a trader swapping in a pair where you hold a position | you, in proportion to your share |

The first two exist whether or not you provide liquidity. The third is the one this post is about. You earn it by putting your own assets into a pair, through the add-liquidity action on [`/pools`](/pools?from=guide), or through an agent that does it under its mandate.

Holding a token by itself pays nothing. **$ENSURE** is the protocol's currency and the rail the volume rides on; it pays no dividend to holders. The fee is pay for a service, providing the other side of a trade, and it goes to the people doing it.

## the $ENSURE pair comes first

Every coin launched under ensurance starts with almost all of its supply in its own pool. Beside that, each new coin is meant to get a pair with $ENSURE, opened by a person after mint at a small size. The idea is simple. If every coin can reach $ENSURE, every coin can reach every other coin through one currency, the way a town with one bridge to the highway can reach every other town.

That makes the $ENSURE pairs the natural place to provide liquidity first. The plan is to deepen one flagship pair, $ENSURE against ETH, before spreading depth across many pairs. A hundred shallow pools is not a market. It is a hundred places where a small trade moves the price. One deep pool, and pairs added where routing earns them, is the order.

Agents take part in this. An agent can run a **liquidity provision** program: it adds a small share of what it holds to a pair, when it holds both sides, inside its owner's mandate and a cap. Protocol wallets do not run it. Agents are not mercenary capital that leaves when a reward ends, because there is no reward to end. They provide depth because the market they depend on needs it.

## why opening a pair sets the price

Here is the part most people skip. When you add liquidity to a pair that does not exist yet, **the ratio you deposit is the starting price**. Put in one unit of currency for every thousand coins, and you have just told the market that is what a coin costs.

If you set that ratio too low, the first trader buys from you cheaply and you have handed them the difference. Set it too high, and nobody trades until the price walks down, at your expense as it goes. The app warns you about this before a new pool opens, and an agent's program adds to pairs that exist; it does not open one, because opening a pair sets the price. Pool creation is a decision a person makes on purpose, with a reason for that pair.

In an existing pool the ratio is set by the last trade, and you add at that ratio. That is safer. It is still not the same as knowing what the asset is worth.

## impermanent loss, honestly

Every liquidity provider in an automated pool carries one market risk that a holder does not: **impermanent loss**, also called divergence loss.

The pool keeps the product of its two balances constant. When the price of one side rises against the other, traders buy the rising side out of the pool and pay in the other. The pool, and so your position, ends up holding less of what went up and more of what went down. When the price falls, the reverse happens: the pool buys the falling side as it falls.

Compare two people who start with the same two assets. One holds them in a wallet. The other puts them in a pool. If the price moves and stays moved, the person in the pool ends up with less than the person who held. Small moves cost little. Large moves cost a lot, and the cost grows faster than the move. It is called impermanent because, if the price comes all the way back to where you entered, the gap closes. If it does not come back, the loss is as permanent as any other.

Three things make this sharper in a small market:

1. **Prices move further on each trade.** In a pool like this, how far a trade moves the price is roughly the trade size divided by what is on the other side. Shallow depth means big swings, and big swings mean more divergence.
2. **One side can fall a long way.** If a coin's price collapses against $ENSURE or ETH, a position in that pair ends up mostly in the coin that collapsed.
3. **Fees depend on trading that may come and go.** The fee is what pays you for carrying the divergence. Whether it covers it is the market's answer, not a promise.

This is not a flaw that ensurance will fix. It is how automated pools work everywhere. What ensurance does not do is cover it up with emissions. There are no farms and no reward tokens here. The pool fee is the pay, so you can see exactly what you are being paid for and what you are carrying in exchange.

:::johnson
**the fee is the pay. the price move is the risk.** — A small pool pays traders' fees to the people who make it, and it moves further on every trade. Provide liquidity to a pair you would be glad to hold both sides of.

[see the pools and add to a pair →](/pools?from=guide)
:::

## who this fits, and who it does not

Providing liquidity fits you if you already want to hold both sides of a pair, you are comfortable with the ratio between them changing, and you want trading on that pair to pay you while you hold. A group that cares about a watershed and holds both its coin and $ENSURE is a natural fit. So is an agent whose mandate names that coin.

It does not fit if you want a fixed income, if you would be unhappy ending up with more of the coin that fell, or if the pair has no reason to trade. It is not a savings account, and it is not a bet that can only go one way.

One rule applies to everyone, including us. Nobody is paid by selling the creator's or the treasury's coins into the pool. The creator's share of each coin is liquidity inventory, put into the market and kept there. Selling it into the pool to fund work would drop the price on everyone else. The people who keep a place are paid from certificates, where the buyer's money goes straight to the named account.

And on volume: an agent buying the coin of the river it sits on, because its mandate says so, is a trade with a reason. One wallet trading with itself to paint a chart is wash trading, and it does not count.

## where this sits on the value gap

A certificate is priced on what it costs to keep a place. The value is what the living work does in a year, by a published method. [The gap](/guide/the-value-gap?from=guide) between them is the living work nobody pays for yet, and nobody gets paid until someone pays. Liquidity sits in the **circulate** position: it earns fees on activity. It does not close the gap by itself. It keeps the market open so that when a dependent starts paying for a flow and later buyers arrive, they can reach the instrument without the price breaking under them.

## four yields from one pair

| yield | what it is here | where it reads |
|---|---|---|
| **financial** | a share of every trader's fee in the pair, in proportion to your position | the pool and your position on [`/pools`](/pools?from=guide) |
| **ecological** | depth that lets payors and buyers reach a place's instruments; the place's condition is what those instruments are based on | the place's account on [`/natural-assets`](/natural-assets?from=guide) |
| **social** | the group, the agents and the people who hold the same pair and keep its market open | the agent, its group, and the proceeds graph |
| **cultural** | a market for a river or a forest that people recognise as theirs, kept open on purpose | the record and the people who answer for it; never a cash payout |

## taking the next step

If you want to provide liquidity, start with a pair you already understand: look at the pools, the depth, the ratio, and what trades through it. Add to an existing pair at its current ratio before you open a new one. If you run a group or an agent and want a mandate that includes liquidity, or you are weighing a larger position in the flagship pair, [talk to someone who can help](/contact?from=guide&topic=every-way-the-work-pays). For how the pools fit with coins, certificates and the currency between them, read the [tokenomics manual](/manual/tokenomics?from=guide) and [what protocol owned liquidity can and cannot buy](/guide/what-protocol-owned-liquidity-can-and-cannot-buy?from=guide).


## the series

- [how to make money with ensurance](/guide/how-to-make-money-with-ensurance?from=guide) (the hub)
- [the value gap is where the money is](/guide/the-value-gap-is-where-the-money-is?from=guide)
- [four yields, one place](/guide/four-yields-one-place?from=guide)
- [what natural asset work pays](/guide/what-natural-asset-work-pays?from=guide)
- [how to bring a property into ensurance](/guide/how-to-bring-a-property-into-ensurance?from=guide)
- [protect your property by paying what protects it](/guide/protect-your-property-by-paying-what-protects-it?from=guide)
- [who gets credit when you bring a deal](/guide/who-gets-credit-when-you-bring-a-deal?from=guide)
- [you make your money when you buy the land](/guide/you-make-your-money-when-you-buy-the-land?from=guide)
- [where you sit in a blended finance stack](/guide/where-you-sit-in-a-blended-finance-stack?from=guide)
- [a coupon that rises with the hazard](/guide/a-coupon-that-rises-with-the-hazard?from=guide)
- [keeping wealth in a living asset](/guide/keeping-wealth-in-a-living-asset?from=guide)
- [how to make an instrument for a place you care about](/guide/how-to-make-an-instrument-for-a-place-you-care-about?from=guide)
- [getting paid to provide liquidity to a small market](/guide/getting-paid-to-provide-liquidity-to-a-small-market?from=guide)
- [the effect is the revenue](/guide/the-effect-is-the-revenue?from=guide)