Liquidity is the lifeline of the finance industry. Financial systems come to a standstill if there is no liquidity, popularly known as money available.
The same way, Decentralized Finance (DeFi) is a general term for any blockchain-based financial services and goods. DeFi protocols are based on smart contracts, self-executing code are key to activities lending, borrowing, and token trading.
Users lock their crypto assets into these contracts, which are known as a liquidity pool, so that others can use them.
Liquidity pools are core to developments of DeFi and there are many protocols that are working today and providing rewards to the users that have staked their crypto assets.
With many crypto exchanges offering their services to users, many also offer liquidity pools service that allows users to earn passive incomes for just holding their assets on the exchange.
Many centralized exchanges and decentralized exchanges have now become very popular, and this helps these exchanges to become one of the best platforms for crypto trade, as they have enough liquidity.
Currently, the feature of earning rewards from providing liquidity is the innovation of the crypto sector, as it is not available in the traditional finance system. It is an essential operation as well as a magnet for investors seeking high risk/high return opportunities.
Display in development for Klever Liquidity Pools
What is the liquidity pool & how does it work?
A liquidity pool is a location where you can store a specific asset, such as money, for a predetermined period. Any users providing assets to these pools are known as liquidity providers.
Assume: you have provided some liquidity to a pool and assume that in a week you’ll need the money to buy some stuff. Liquidity pools allow you to withdraw your money whenever you choose without any issues.
For the period for which you have stored your assets, you also gain some rewards, so many exchanges are offering this service, which is becoming very popular today. The more liquidity in the exchange, the more stable it is for trading.
Lack of tokens to trade is referred to as having no liquidity in a cryptocurrency exchange.
When you enter an exchange and there isn’t enough cryptocurrency available to trade, you’ll see that there isn’t enough ‘depth’ to ensure that the orders are perfectly matched.
Due to a lack of liquidity, you won’t be able to fill as many orders as you would like. Once there is additional liquidity, or more crypto orders introduced into the pair’s order book through liquidity pools, this problem is resolved.
Automated market makers (AMM) are the real force behind the liquidity pool in any crypto exchanges.
Automated market makers effectively facilitate transactions by bridging the gap between token purchasers and sellers. As a result, buying or selling tokens doesn’t need a lot of hassle, such as finding someone else who has the tokens and wants to transfer them.
Automated market makers generate income from trading by receiving a small commission for each transaction.
Why do users provide liquidity?
Liquidity pools can be profitable for investors. DeFi protocols compensate users for providing liquidity.
The term yield farming refers to an investing technique in cryptocurrencies where users move assets between multiple protocols in order to take advantage of yields before they run out.
The majority of liquidity pools also offer LP tokens, which function as a kind of receipt and may later be traded for incentives from the pool that are based on the liquidity that was offered.
To increase yields even further, investors may occasionally stake their LP tokens on different protocols.
Klever Exchange is testing its liquidity pool
Klever, one of the fastest-growing crypto ecosystems, has been testing its liquidity pool service for some time now.
The exchange will be launching the service soon, where users can stake their selected crypto assets and earn some rewards.
Initially, three pairs, namely KLV/USDT; BTC/USDT; and ETH/USDT will be offered to users.
Imagine you have crypto assets that you are holding in your crypto exchange account: why not earn passive income for holding crypto assets; this is what a liquidity pool does.
Liquidity pools help users earn passive income from lending their crypto assets on the exchange and experience financial freedom.