Liquidity the Soul of DEFI

Liquidity has been an issue for most traders, whereby you invest and you’re unable to take profits nor get the value of your capital immediately after buy.

In this Article I’ll cover:

• What is Liquidity?

• Price impact and Rugull

• Why Liquidity?
• How to Calculate Liquidity
• Investing in less liquid Projects
• Tool to Research on Liquidity
• How to Identify locked Liquidity

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-> What is Liquidity?
Liquidity is one of the most important component in a project.

Liquidity is popularly known as the soul of a project.

It is the fund initially added by a developer to a liquidity pool to give the token value(Price) and enable smooth trades for investors.

Developers are the first Farmers💯

PS: It is advisable to buy tokens from the DEX in which liquidity is provided.
If liquidity is provided on @bakery_swap then its advisable to make your trades from there.

YOU can also provide liquidity as an investor.

-> Price Impact

Price impact is the effect of your buy/sell order of a token to the liquidity supplied on it in a DEX.

When Price impact is too high, it means your transaction won’t go through unless you increase slippage which means loosing some of your token and money.

-> Rugpull
This is when a Dev removes liquidity from a token thereby leaving your investment worthless.

E.g: Your 100$ Becomes $0.000

Its sad, yet avoidable we’ll see How in this thread💯

-> Why Liquidity
This can easily be found in the definition of liquidity as stated above, but I’ll elaborate

When a token is created on the blockchain, it has no value, its just a set of codes deployed, but liquidity helps determine the price of these tokens and gives it Value.

-> How to calculate Liquidity

Liquidity can be calculated by multiplying the tokens supplied for liquidity by the current price.

Using this method I once discovered a DEV only provided $1 for liquidity, I confronted him then he deleted telegram and rugged😅, welps I was safe.

Low Liquidity is the reason why you see a Degen doing 3000% and you’re only up 3x instead of 30x.

DEVs calculate liquidity differently, for a dev to ascertain the price he wants the project to start with he/she must provide the adequate liquidity for that.

My experience as a PM has made me do research on these to give Devs adequate advices and of course seek expertise of token economists.

The Liquidity pool uses an AMM(Automated Market Maker) to determine impact of demand on token prices, using the constant Product Formula: X * Y=K

Let’s briefly dive in

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The above images are detailed calculations on how price impact works for an investor and a developer.

View the images above carefully, save them or keep this article to revise anytime you need them.

Ask any questions on areas you don’t understand, in the comment section.

To avoid a bulky article, I’ll be stopping here for now, in the next article, Part 2 we’ll discuss the following👇,

• Investing in less liquid Projects

• Tool to Research on Liquidity

• How to Identify locked Liquidity

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