Liquidity pools are place to pool tokens (which we sometimes call liquidity) so that users can use them to make trades in a decentralized way. These pools are created by users and decentralized apps (or Dapps, for short) who want to profit from their usage. To pool liquidity, the amounts a user supplies must be equally divided between two coins: the primary token (sometimes called the quote token) and the base token (usually ETH or a stable coin). SushiSwap's liquidity pools allow anyone to provide liquidity at the following link: https://exchange.sushi.com/#/pool. When they do so, they will receive SLP tokens (SushiSwap Liquidity Provider tokens). If a user deposited $SUSHI and $ETH into a pool, they would receive SUSHI-ETH SLP tokens. These tokens represent a proportional share of the pooled assets, allowing a user to reclaim their funds at any point. Every time another user uses the pool to trade between $SUSHI and $ETH, a 0.3% fee is taken on the trade. 0.25% of that trade goes back to the LP pool. The value of the SLP tokens, which represent the shares of the total liquidity each pool, is updated with each trade to add their value relative to the tokens the pool uses to trade. If previously there were 100 SLP tokens representing 100 ETH and 100 SUSHI, each token would be worth 1 ETH & 1 SUSHI (note in this example, ETH and SUSHI are the same relative value). If a user were then to trade 10 ETH for 10 SUSHI in that pool, and another user were to trade 10 SUSHI for 10 ETH, then there would now be 100.025 ETH and 100.025 SUSHI. This means each LP token would be worth 1.0025 ETH and 1.00025 SUSHI now when it is withdrawn.
Adding liquidity is really straightforward. First, you must choose which tokens to input. Click "Select Token".
If you have never used SushiSwap before, this will trigger a popup asking you to choose a list of tokens. Click on "Choose a list".
There are different lists to choose from, but in this example we will be using the SushiSwap Menu.
After choosing a list, you will be shown the tokens represented in that list along with your balance of them (if any). In this case, we only have two to choose from, CRV and ETH.
After selecting our desired input tokens, we're ready to click "Supply"! If this is your first time interacting with SushiSwap's smart contracts for either or both of the tokens in question, you will be prompted to "Approve" that our smart contracts are allowed to handle them for you.
When the liquidity add is done, you receive Sushi Liquidity Provider (SLP) tokens in return. These represent your share in the liquidity pool, and your earned fees that are received upon withdrawal of the liquidity.
If the pool you wish to provide liquidity to does not exist, you can create it of course! Just provide the tokens, and off you go. As the first liquidity provider, you set the initial exchange ratio (price) if one of the tokens in the pair does not exist yet on SushiSwap. This often quickly corrects itself through arbitrage and by more liquidity providers adding to the pool.