Earning Fees as a Liquidity Provider

This article explains how to provide liquidity to the AuUSD/USDC pool on Uniswap V2 and earn rewards through trading fees and Merkl incentives.

By the end of this guide, you'll understand how to become a liquidity provider, earn trading fees and Merkl rewards, manage your position, and claim rewards.

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Before You Begin

Prerequisites Checklist

Before providing liquidity, ensure you have:

Token Holdings:

• AuUSD in your wallet

• USDC in your wallet (approximately equal value to your AuUSD)

• Sufficient amounts to make it worthwhile (suggested minimum $100 each)

Network Requirements:

• Wallet connected to Polygon network

• Sufficient POL for gas fees (at least 1 POL recommended)

• POL needed for multiple transactions

Knowledge:

• Understood what liquidity providing means

• Aware of impermanent loss concept

• Comfortable with DeFi interactions

• Prepared to monitor your position

Understanding Liquidity Provision

What is a Liquidity Provider?

When you provide liquidity on Uniswap V2, you:

• Deposit equal values of AuUSD and USDC into the pool

• Receive LP (Liquidity Provider) tokens representing your share

• Enable others to swap between the two tokens

• Earn 0.3% of all swap fees proportional to your share

• Can withdraw anytime by returning LP tokens

Think of it like funding both sides of a currency exchange booth and earning fees from every transaction.

How Uniswap V2 Liquidity Works

Simple 50/50 Split:

• Always provide equal values of both tokens

• Example: $500 AuUSD + $500 USDC = $1,000 total liquidity

• Your liquidity covers full price range automatically

• No need to set price ranges (unlike V3)

LP Tokens:

• You receive ERC-20 LP tokens representing your position

• Tokens show your percentage of the pool

• Can be transferred like any token

• Burn LP tokens to withdraw your liquidity

Automatic Rebalancing:

• Pool automatically maintains 50/50 value ratio

• As prices change, token amounts adjust

• This creates impermanent loss (explained below)

• No action needed from you

How You Earn

Trading Fees (0.3%):

• Every swap pays 0.3% fee

• Fee is automatically added to pool reserves

• Your share grows without claiming

• Compounds automatically

Actual returns vary based on:

• Pool trading volume

• Your share of total pool

• Current Merkl reward rates

• Market conditions

Understanding Risk: Impermanent Loss

What is Impermanent Loss?

The difference between holding tokens vs providing liquidity when prices change:

• If AuUSD/USDC ratio changes significantly, you may have less value than just holding

• Loss is "impermanent" because it disappears if prices return to original ratio

• Becomes permanent when you withdraw liquidity

For AuUSD/USDC Specifically:

Since both are stablecoins targeting 1:1 ratio:

• Price rarely deviates far from 1:1

• Impermanent loss is typically minimal (under 0.1%)

• Trading fees and rewards usually far exceed any loss

• One of the safest pairs for liquidity provision

Example

• Deposit: 1000 AuUSD + 1000 USDC (at 1:1 ratio)

• AuUSD temporarily drops to 0.98 USDC

• Impermanent loss: ~$1 (0.1%)

• Monthly trading fees: ~$10-15

• Merkl rewards: ~$15-25

• Net gain: Still positive despite impermanent loss

Other Risks:

• Smart contract risk (Uniswap V2 is battle-tested and secure)

• Gas fees for entering and exiting position

• Opportunity cost vs other yield options

• Reward programs can change or end

Step-by-Step Liquidity Provision

1

Prepare Your Tokens

1. Check balances:

   • Note your AuUSD balance

   • Note your USDC balance

   • Calculate equal USD values

2. Acquire tokens if needed:

   • If you have more USDC: Swap half for AuUSD

   • If you have more AuUSD: Swap half for USDC

   • Aim for equal dollar values

Example calculation

• You want to provide $1,000 total liquidity

• Need ~500 AuUSD (worth $500)

• Need ~500 USDC (worth $500)

• Interface will show exact ratio needed

2

Access Uniswap Interface

1. Navigate to https://dapp.auresources.io

2. In the navigation menu, click the "Markets > Provide liquidity" link

3. Or access the Uniswap interface directly

4. Ensure your wallet is connected to Polygon network

5. Click the "Next" button

3

Add Liquidity

1. Enter amount for one token:

   • Type amount of AuUSD you want to deposit

   • Interface automatically calculates matching USDC amount

   • Or type USDC amount and it calculates AuUSD needed

2. Click the "Verify" button

3. Review the deposit:

   • AuUSD amount

   • USDC amount

   • Share of pool you'll receive (percentage)

   • LP tokens you'll receive

   • Exchange rate

4. Click the "Create" button

5. Confirm the transaction in your wallet

6. Wait for confirmation (5-30 seconds)

7. Success! You now hold LP tokens

4

Verify Your Position

After transaction confirms:

1. Check wallet for LP tokens:

   • Look for "UNI-V2" or "AuUSD-USDC LP" tokens

   • Amount represents your pool share

   • Keep these tokens safe (they represent your deposit)

2. View position in interface:

   • Go to "Pool" tab

   • See your liquidity position

   • View your share percentage

   • Track earnings accumulation

3. Save important details:

   • Amount deposited (AuUSD + USDC)

   • LP tokens received

   • Transaction hash

   • Date of deposit

Troubleshooting

Common Issues

Can't Add Liquidity:

• Verify you have both AuUSD and USDC

• Check amounts are sufficient (minimum liquidity)

• Ensure wallet connected to Polygon

• Confirm enough POL for gas fees

LP Tokens Not Showing:

• Add token manually using contract address

• Check correct network (Polygon)

• Refresh wallet interface

• View on PolygonScan to confirm receipt

Can't Remove Liquidity:

• Ensure you have LP tokens in wallet

• Check wallet is connected

• Verify on correct network

• Confirm sufficient POL for gas

Key Takeaways

Providing liquidity to the AuUSD/USDC pool on Uniswap V2 earns you 0.3% of every swap that goes through the pool. Your share of fees is proportional to your share of total liquidity. The process is straightforward: deposit equal values of both tokens, receive LP tokens, and start earning immediately.

Trading fees compound automatically into your position, growing your LP token value over time. There's no claiming needed for these fees - they're realized when you remove liquidity by comparing what you withdraw to what you deposited. For stable pairs like AuUSD/USDC, impermanent loss is minimal (typically under 0.1%) and easily offset by trading fees.

Unlike Uniswap V3, there are no price ranges to set. Your liquidity covers all prices automatically, which means you always earn fees regardless of price movements. You can remove your liquidity anytime - there's no lock-up period. This makes liquidity provision a flexible way to earn yield on your stablecoins while supporting the AuResources ecosystem.