Farming on Layer 2 Liquidity pools — How does it work?

VyFinance
3 min readJun 5, 2023

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Have you acquired your L1-LP tokens, and are considering getting involved in Layer 2 LP (L2-LP)?

In this article we describe how L2-LPs work, along with the rewards structure to help users better understand these LP tokens and how they operate.

Let’s begin by describing the naming structure of these L2-LPs

L2-LPs on our “Home” Page

Image 1. An L2-LP farm on our “Home”

You can see a list of available L2-LP farms on our Home page. This is read as “Matching token” + “L1-LP pair”

In image 1 above, this shows the ADA plus the ADA/VYFI L1-LP token pair.

Trading L1-LPs

Image 2. An example of an L1-LP in the DEx

When you approach our DEx to trade, you will be able to directly purchase L1-LP tokens from the market. You can read which L1-LP pair it is by looking at the pair between the “_”. The structure for reading L1-LPs is as follows:

“DEX of LP”_”LP Pair”_”LP” (identifying liquidity pool token)

Reading L2-LPs

Image 3. Your L2-LP tokens under “your liquidity”

Under the “your liquidity” tab, you can see your L2-LP like the image above. These use the formal L2-LP token name (also how they will appear in your wallet), which is a combination of how the LPs are shown on the homepage and the L1-LP from trade. Let’s go through it:

“ADA”/”VYFI_ADA/VYFI_LP”” “LP”

Is read as:

“Token paired with the L1LP”/”L1LP” “LP” (to signify it is an LP token)

So this would be the L2LP pair made up of ADA and the ADA/VYFI L1LP.

Estimating L1LP contents inside L2LP

Under this tab, we can see the amount of ADA and LP token held in the L2-LP by the user. We will soon be integrating a method to see the contents of the L1-LP as well. You can quickly estimate the contents of the L1-LP by dividing the ADA contents of the L2-LP by 2. Using the example of Image 3:

Pooled ADA: 11.138

Pooled LP VYFI_ADA/VYFI_LP: 4,985,159

We would divide Pooled ADA by 2, giving us 5.569 ADA + 5.569ADA worth of VYFI. Remember, the pools between the L1-LP and the L2-LP aren’t perfectly arbitraged, so this is an estimate.

The estimated total value of the L2-LP is 11.138ADA + 5.569ADA + 5VYFI = 15.707ADA + 5VYFI. We will have this value shown soon on this page. You can see the current total ADA value of L2-LP that you hold by expanding the L2-LP on the “Home” page and reading “Pool Ownership”, as per Image 4.

Image 4. “Pool Ownership” showing ADA value of L2-LP held by the user.

How to calculate farms with L2LP tokens.

There are four sources of APR that make up the return on the L2-LPs. These are:

Farm from L-LP

Farm from L2-LP

Fees from L1-LP

Fees from L2-LP

It is important to remember that as the L2-LP has double the value of the L1-LP (as it is made up of the L1-LP matched with its value in ADA), the APR received from the L1-LP farm will be about half as it would if only in the L1-LP. You can hover over “APR” for the L2-LP pool to see the impact of each of these four sources.

MORE INFORMATION ON FARMING WITH VYFINANCE:

SOCIALS

Twitter: https://twitter.com/VyFiOfficial

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YouTube: https://www.youtube.com/@VyFinance

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