Liquidity pools can address market liquidity by encouraging users to supply liquidity in exchange for a portion of trading commissions.
It allows trades to occur with little slippage even for the most illiquid trading pairings since they do not require sellers and buyers to match, which means they do not have to swap their two assets for a specific price.
Through automated trading, liquidity pools address this problem and eliminate the requirement for an order book.
Though there are many features there, you must learn about liquidity pools.
The liquidity of the cryptocurrency market is crucial.
In addition to reducing investment risk, liquidity in cryptocurrencies helps you define your exit strategy and makes it simple to sell your stake. Investors and traders like liquid crypto markets as a result.
The ability to effectively buy or sell an asset at any time, as desired by the investor, is one of the most crucial factors to take into account when making any investment.
After all, if the seller cannot realize their gains, what good is there in making a profit?
This applies to Bitcoin and other cryptocurrencies as well. The liquidity of the asset will largely determine whether and how big of a position a smart investor would take in the investment.
In the context of cryptocurrencies, liquidity refers to how quickly a digital currency or token may be exchanged for cash or another digital asset without affecting its price.
A deep market with plenty of liquidity is a sign of a healthy market since liquidity is a measure of the external demand and supply of an asset.
All things being equal, the more liquidity an asset has, the more stable and less volatile it should be
- Automated Market Makers (AMM)
Automated Market Makers are revolutionizing the cryptocurrency sector by improving their usability and effectiveness among users, which also benefits investors.
Automated Market Makers (AMMs) use liquidity pools to enable automatic, consent-free transfers of digital assets in place of a traditional market of producers and consumers.
On a typical trading platform, buyers and sellers each offer a different price for the same asset. A posted price becomes the asset’s market price when other users trade it at that price because they think it to be reasonable.
Using this conventional market structure, a range of assets, including stocks, gold, real estate, and others, are traded. AMMs, however, use a different style of trading. AMM is the underlying protocol for decentralized exchanges’ autonomous trading systems.
AMM supports the creation of a liquidity system that anybody can contribute to.
Insufficient liquidity could result in slippage. A lack of liquidity can also cause the market’s asset values to fluctuate too much. AMMs also give everyone the opportunity to act as a liquidity provider, which has benefits. A tiny portion of the fees received from transactions made through the pool goes to liquidity providers – the people who invested in them
- Impermanent Loss
A crypto token’s value may fluctuate in relation to another due to supply and demand factors, which could result in a temporary loss of value.
This problem arises when a rapid price increase in one of the assets causes the ratio of two owned assets to get out of balance.
Liquidity providers lose out on the profit from one of their assets due to an impermanent loss.
If a liquidity provider withdraws his money from the pool before the price rises, the loss becomes permanent. When the term for liquidity pool ends, the user will not receive the exact number of tokens he deposited.
Let me explain with an example:
Suppose in the KLV/USDT pair, if the KLV appreciates a lot during the period, the Automated Market Maker (bot) will sell the KLV and buy USDT according to the price.
If the person leaves the pool at this point, they will receive more USDT than the KLV they put in, plus the pool rewards.
So, users earning on both the pairs will be different from what they have calculated before the pool has started.
Therefore, users that may have claimed their rewards before KLV’s appreciation experienced the Impermanent Loss because they earned less than the ones who stayed until the end of the pool.
Liquidity pool on Klever Exchange coming soon
One of the fastest-expanding crypto ecosystems, Klever, will be introducing its own liquidity pool following the introduction of its own chain, KleverChain.
Imagine that you have cryptocurrency assets that you retain in your cryptocurrency exchange account.
Instead of sitting dormant, why not put those assets to work and generate some income? This is what a liquidity pool does.
During the initial launch of the Liquidity Pools in the Klever Exchange, three pairs that include KLV/USDT, BTC/USDT and ETH/USDT will be offered to users.
To summarize, the Liquidity Pool is another mechanism that enables users to make passive income by lending their crypto assets on the exchange, giving them even more financial independence.