What this article isn't
This isn't a click-by-click step-by-step. UIs change. What's stable is the underlying mechanics — the AMM model, the fee math, the impermanent loss risk.
We don't have a financial relationship with DragonSwap. The walkthrough is offered because Sei Wallet users frequently ask about LPing.
What DragonSwap is
DragonSwap is an automated market maker (AMM) decentralized exchange (DEX) on Sei. Sei-native (contracts deployed directly on Sei). AMM (trades execute against algorithmic liquidity pools, not order books). Constant-product formula — price emerges from the ratio of tokens.
vs. CEX: no signup/KYC at protocol level, self-custody throughout, slippage on larger trades, fees go to LPs not central operator.
What "providing liquidity" actually does
Deposit equal value of both tokens into a smart contract. The contract gives you LP tokens representing your share. Every trade pays a fee (typically 0.25% to 0.30%); the fee gets added to the pool, increasing LP token value.
When you remove liquidity, you redeem LP tokens for the underlying tokens at the pool's current ratio. This is where impermanent loss enters.
The basic flow (conceptually)
- Approve the tokens. One-time per-token approval.
- Deposit equal value. Not equal count.
- Receive LP tokens.
- Earn fees over time.
- Withdraw when ready.
Each step pays gas in SEI. Make sure you have SEI for fees on top of what you deposit.
Impermanent loss explained
The simplest framing: if the price ratio changes meaningfully while your liquidity is in the pool, you end up with less of the appreciating token and more of the depreciating one. Your LP position underperforms simply holding.
Hypothetical example: deposit 100 SEI + 100 USDC at $1 SEI = $1 USDC. SEI rises to $2. Your LP share rebalances to ~71 SEI + ~141 USDC = ~$283. Just holding would now be worth $300. Loss relative to holding: ~$17, or ~5.7%. Trading fees offset some.
Impermanent loss is "impermanent" because it disappears if the price returns to the original ratio. It becomes permanent when you withdraw.
Other risks
Smart contract risk. Bugs or exploits drain LPs. Audits help, don't eliminate.
Market risk. SEI dropping 50% drops your USD position too. LPing doesn't hedge market risk.
Approval residue. Token approvals stay until revoked. Periodically review and revoke unused approvals.
When LPing makes sense
Reasonable: you hold both tokens anyway, you expect range-bound trading, you're allocating a small portion to LP earn-mode.
Questionable: you're directionally bullish on one token (LPing dilutes upside), you expect high volatility, you're using leveraged or borrowed funds, the pool's volume is very low.
Practical workflow with Sei Wallet
- Confirm SEI balance for deposit + gas
- Open DragonSwap from Sei Wallet's dApp directory
- Sei Wallet's connect flow signs approve and deposit transactions
- Track your LP position from Sei Wallet's portfolio view
- Withdraw via DragonSwap when ready
The honest take
LPing earns trading fees and takes impermanent loss + smart contract risk. The net outcome depends on the specific pool, volatility, and duration. For SEI holders who already hold USDC for transactional purposes, LPing the SEI/USDC pair is a reasonable way to earn yield on capital you'd hold anyway.
If you've never LP'd before, start small. A 50-100 SEI position teaches the mechanics with limited risk.