What are Liquidity Pools?
Liquidity Pools: the backbone of DeFi and a great option to earn on your crypto
Sellers try to sell their crypto at the highest price, and buyers want to buy at the lowest. How do these fundamentally different needs come together and make trading possible at all?
Let’s start with a basic term, market makers, which facilitate any trading with assets.
In traditional markets like the New York Stock Exchange or centralized crypto exchanges like Binance, market makers are all individuals or entities who want to buy or sell their assets. They will place their orders in the order book. A transaction will happen when the supply (seller) meets the demand (buyer). Market makers require a constant monitoring of supply and demand on a given market.
If this sounds like a complex and centralized process to you, you’re definitely right.
In Decentralized Finance (DeF), nothing is slow so instead of market makers, a much faster and more convenient way to facilitate trading was invented: Liquidity Pools.
Liquidity pools are market makers on steroids. They make trading and swapping crypto super-easy and fast.
How exactly?
👉 They facilitate trading across cryptocurrencies
👉 They provide liquidity with reserves of tokens locked in a smart contract
👉 There’s no human intervention with Automated Market Makers
If you’d like to know how you can profit from Liquidity Pools and how you can become a Liquidity Provider, here’s a great read to get started 👇
