> For the complete documentation index, see [llms.txt](https://docs.bitdrive.finance/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.bitdrive.finance/features/liquidity.md).

# Liquidity

Liquidity Pools are a collection of funds that are locked in a smart contract. They are used to let others carry out transactions, including lending, borrowing and trading.

The liquidity that exists on exchanges comes from Liquidity Providers (LPs), users or entities in the crypto space, who stake their tokens in **Liquidity Pools**.

Liquidity providers stand to earn trading fees and other assorted crypto rewards from those exchanges where they contribute to the pool.

## Liquidity in 3 simple steps:

1. Provide a pair of tokens to help others trade
2. Earn a share of transaction fees
3. Re-invest your LP tokens into farms for bonus rewards (coming soon)

When someone makes a token swap, a transaction fee of 0.3% will be charged. 20% is returned to liquidity providers in the form of a fee reward. 

{% hint style="warning" %}
**Impermanent loss**

Impermanent loss can take place when you provide liquidity to a pool and the price changes. Due to high volatility in crypto, this can happen more frequently than novice investors often realize.

This risk essentially is how much more value your crypto may have become if you had simply held on to it instead of providing liquidity.

Impermanent loss only becomes permanent when you decide to withdraw your liquidity.
{% endhint %}


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