Guide To Understanding What are Liquidity Pools in Crypto Means

Understanding what are Liquidity Pools in Crypto? If you are into cryptocurrency or Decentralized Finance ecosystem (Defi) you may have come across this crypto glossary a number of times. If you’re on this article right now, you are definitely looking for the meaning of Liquidity Pools and how they go about, and why it is needed in the Decentralized finance (Defi) ecosystem.

In this article, we will give you a detailed explanation of what Liquidity pools are, how they work, the importance of liquidity pools are so much more.

What are Liquidity Pools?

Much decentralized finance (Defi) platforms like the ones we have listed above use Automated Market Makers (AMMs) this makes it possible for digital assets like Bitcoin, Eth, ADA, etc. to be traded in a reflexive and permissionless way.

liquidity pools in crypto

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How do Liquidity Pools in Crypto work?

For example, If Karl supplies a pool with liquidity, the liquidity provider (LP) is rewarded with special tokens called LP tokens the amount of LP Tokens rewarded to the Liquidity Provider is measured in the magnitude of how much Liquidity they add to the pool. Simply put, a fractional fee is shared among the LP token holders.

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In the eyes of the LP, the LP tokens earned holds value in their own rights and be made utilized in various ways through the Decentralized finance (Defi) ecosystem when the need arises.

What is the Importance of Liquidity Pools?

  • Liquidity Pools have played an important part in the revolution of Defi. Liquidity Pools allow the exchange of an unlimited large number of digital assets like Bitcoin with any other supported assets in Decentralized finance space or ecosystem.

What are Liquidity Pools in Decentralized finance (Defi)

Recently, the Defi ecosystem has surpassed the $60 billion valuations making it an all the record valuations.

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Advantages of Liquidity Pools

  • There is assured liquidity at every price trade level. Due to constant liquidity, traders do not necessarily have to connect to other traders.
  • Lower gas fees
  • Anyone can become a liquidity provider and earn because liquidity pools do not require much from investors who want to provide liquidity pools.

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Nana Yaw Jr.

iWrite about Tech, Crypto, Apps, Fintech & other things 🔹🔹 and other niche blogs