The term Liquidity has been the biggest concern over the years for Cryptocurrency and Blockchain related projects. In general, this problem of liquidity occurs in Financial Markets too. This resulted in DeFi- The New Decentralized Finance and also DeFi Liquidity or decentralized liquidity.
The decentralized liquidity acts as a backbone in refining DeFi space more convenient and efficiently among both the DeFi developers who build DeFi tokens,DeFi smart contracts, and more & also users who use DeFi based lending, exchange platforms, and so on.
“You only Fail, When You Stop Trying”
Likewise, “You become outdated When you stop updating “ !
Let us update ourselves with the concept of “DeFi Liquidity” !!
Here let us deeply look at what is a liquidity pool and how it works and its needs in decentralized finance (DeFi) space.
Already, we all know that liquidity means the ability of converting an asset to cash.In decentralized crypto globe,the liquidity refers to ability to enter in crypto market.
As said above, liquidity is a concerned term not only in crypto and blockchain globe but also in financial sectors. As the Financial System faces many challenges such as lack of transparency and time consumption, there arose a new way of making financial transactions, called Decentralized Finance DeFi. This decentralized open-source system offers a permissionless, high liquidity, transparent financial services.
Even Though DeFi provides seamless financial transactions, there also prevails the problem of liquidity in the DeFi globe.
Since, liquidity pools, liquidity providers make their best way to provide high liquidity in all DeFi related services and platforms.
What are DeFi liquidity pools?
Liquidity pools or pools of tokens or pools of assets are nothing but a decentralized smart contract that locks up the crypto tokens or crypto assets. This lock-up of assets is done to facilitate the crypto trading by providing greater liquidity.
This concept of Liquidity pools became popular in DeFi, after the launch of the famous DeFi liquidity pool Uniswap.
The crypto users who stake or store their assets in these liquidity pools to
yield more assets or income through the concept of DeFi Yield Farming are known as liquidity providers.
Why do we need Liquidity Pools in DeFi?
Most of the familiar crypto exchanges work on the basis of the Order Book Model, where buyers and sellers come together and place an order. And there come market makers who facilitate the trading by always willing to buy/sell assets. This makes the users trade anytime without waiting for any counterparties by providing high liquidity.
This same concept of market makers or liquidity pools can also be implemented in Decentralized Finance to reduce the issues of liquidity in DeFi.Without market makers, any platform would become illiquid and unusable for users of the platform. Since, most of the DeFi platforms are on Ethereum, which collects Gas fees for each and every transaction on smart contracts, which can make transactions cost-effective and may face many liquidity issues.
Thus, the involvement of DeFi liquidity pools can play a vital role in maintaining liquidity in decentralized finance.
Key Advantages of Liquidity Pools in DeFi
- Provides and bootstrap liquidity Providing Network
- Offers added assurance for large investors
- Acts as Insurance for Token holders
- Helps for fast cross border transactions with automated smart contracts
- Reduces Liquidity Risks in decentralized finance.
- Lower Gas Fees
- Liquidity Providers earn passive income
How Do DeFi Liquidity Pools Work?
In general,a liquidity pool holds two tokens and each creates a new market for that pair of tokens. DAI/ETH is the best and popular liquidity pool in DeFi on the Uniswap platform.
The first liquidity provider is one who sets the initial price of assets in that pool, at the time of pool creation. The liquidity provider (LP) receives special tokens known as LP tokens when liquidity is supplied on the pool.
If any LP wants their underlying liquidity back, he must burn his LP tokens. The mechanism through which the price adjustments are made for each token swap on the liquidity pool is termed as Automated Market Maker (AMM).
There are more popular DeFi Liquidity pools such as Uniswap, Bancor, and more.
Popular DeFi Liquidity Pools
Listed here are the top 5 liquidity pools in DeFi markets making more impacts on users and financial services.
- CCTip Swap
- OIN Finance
- Kyber Network
- Unipig and StarkDEX
Top Cryptocurrency Exchanges that Includes DeFi Liquidity Pools
Here is the list of popular cryptocurrency exchanges that support token swapping in defi liquidity platforms.
- Binance — Supports for New Token Swapping with Uniswap DeFi liquidity platform
- Wazirx — Has initiated YFI/INR trading with yearn.finance, popular DeFi liquidity platform
- Coinbase — Allows investments in Uniswap and yearn.finance
- Poloniex — Supports deposits of DeFi tokens LEND,BAL,LRc and more
- Kucoin — Provides a way to earn through yearn.finance liquidity pool.
There are many other crypto exchanges in the market such as Gemini, Houbi, and more who support liquidity pools with decentralized finance open-source protocols.
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