What are Liquidity Pools?
How do they work? Why do we need them?
The ASSEMBLE Protocol is a blockchain-based global point integration platform that exploits ASM utility tokens, whilst establishing a business ecosystem that can integrate, utilize existing points and miles with point providers, consumers and retailers.
Hello, dear readers! Today we’re going to take a look at liquidity pools within Decentralized Finance (DeFi). As we’re sure you’re aware, blockchain technology is being used for many new things besides just cryptocurrency. Liquidity pools can also be found in a variety of new projects from games to investment, so it’s good to know what liquidity pools are and how they can be used. Read on to become more familiar with this essential concept in DeFi.
The Importance Of Liquidity Pools In Decentralized Finance (DeFi)
Liquidity pools are one of the fundamental concepts that support the Decentralized Finance ecosystem. It is an essential component of automated market makers (AMM), lending protocols, yield farming, synthetic assets, on-chain insurance, blockchain gaming, and more.
On-chain activities related to Decentralized Finance (DeFi) have exploded recently. The volume of transactions occurring on decentralized exchanges (DEX) is significant enough to be competitively compared to the volume of transactions on centralized exchanges. As of December 2020, DeFi protocols had frozen USD 15 billion worth of assets. The DeFi ecosystem is growing rapidly with new types of products. One of the key technologies behind all these products is liquidity pools.
Liquidity Pools
Liquidity pools are funds frozen within smart contracts. Liquidity pools are used to support various functions, such as decentralized trading and loans, which we will cover in future articles.
Liquidity pools are the core of many decentralized exchanges (DEXs) such as Uniswap. Liquidity providers (LP) add two tokens of equal value to a pool and create a market. In exchange for providing their own funds, users receive transaction fees from their pool in proportion to how much liquidity they supplied to the pool.
Actually, anyone can become a liquidity provider. Recently, automated market makers have made it even easier for users to create their own market.
How Do Liquidity Pools Work?
One of the first protocols to use a liquidity pool was Bancor, but the liquidity pool concept gained more attention with the popularity of Uniswap. Popular exchanges that use liquidity pools on Ethereum include SwushiSwap, Curve, and Balancer. These DEX liquidity pools support ERC-20 tokens. On the Binance Smart Chain (BSC), there are exchanges that support BEP-20 tokens in their pools, such as PancakeSwap, BakerySwap, and BurgerSwap.
Since supplying liquidity to the pool is a simple concept, it can be used in a variety of ways. One of them is to earn interest through liquidity mining. Liquidity pools are the basis for automated interest-generating platforms such as Yearn, where users can add funds to a pool and collect interest.
Distributing new tokens to the right people in cryptocurrency projects is a very difficult problem. Liquidity mining is one of the more successful approaches for solving this problem. Tokens are distributed to users who provide tokens to a liquidity pool based on an algorithm. The newly created tokens are distributed according to each user’s stake in the pool.
Assemble plans to add a liquidity pool to Decentralized Exchanges (DEX) such as Uniswap or PancakeSwap. Assemble will be available within a more expanded ecosystem and will be more easily accessible to global users in the future.
Thanks for stopping by today! We covered a lot of tough topics from DeFi to DEX to liquidity pools. Hopefully, this article gave you a better idea about all the amazing things that are possible on the blockchain. Stay tuned for further updates!
