How Do Liquidity Pools Work?
You’ve most probably heard of DeFi liquidity pools as a way to make money.
Indeed, a lot of people have driven into liquidity pools as they promise annual returns and a considerable passive income. But the majority doesn’t know how a liquidity pool works exactly, or even what liquidity pools are!
In this post, we’re going to glance over what a liquidity pool is, how it works, what are the advantages of becoming a liquidity pool provider, and how you can become one. Let’s start rolling!
What is a Liquidity Pool?
Liquidity pools are giant pools of money. They are a large sum of tokens secured with a smart contract that aims to expedite the trading of assets.
As the sellers price their tokens higher and the buyers demand the tokens for lower rates, liquidity pools assist both sides and create a smooth and efficient trading ground for tokens.
DeFi liquidity pool providers use AMM (Automated Market Makers) to determine the ideal price for the tokens and create a seamless trading environment. Therefore, liquidity pool platforms are critical to the trade of crypto tokens. Examples of liquidity pools include DAI-ETH, USDC-ETH, among many others.
How do Liquidity Pools Work?
The way liquidity pools work is several liquidity providers purchase a fixed number of locked tokens for a specified price. This gives the platform liquidity so that it can start token trading.
Once the trading starts, the DeFi liquidity pool platform charges a certain fee on transactions, processing, and such. This amount is distributed into the liquidity pool, which means the liquidity providers get returns on their investment.
The higher the liquidity there is in a pool, the more resilient the shift in price (slippage) is as the tokens are traded. This is how the entire system works. Of course, while liquidity pool platforms can create a sustainable side income for you, there is always the associated risk that the platform isn’t used enough. The transaction fee may also not be enough to repay your investment for a very, very long time.
Becoming a Liquidity Pool Provider
If you’re willing to take the risk and become a liquidity pool provider, you must find a promising liquidity pool platform and purchase the desired amount of tokens within the smart contract!
A classic liquidity pool platform is KingSwap. A fork of UniSwap, KingSwap is a fully decentralized finance protocol for automated DeFi liquidity pool provision based on Ethereum. KingSwap’s token ticker is called $King. It offers 1 billion tokens for security in its liquidity pool, 10,000 tokens per mined block over 100,000 blocks.
The best part is, KingSwap offers outstanding pool rewards and network effects that make your investment all the more profitable over time.
Liquidity pools serve as a liquidity provider to a majority of DeFi services trading tokens. With this post, you’ve got all you need to know to get set with liquidity pools and become a provider!
We hope you’ve found this post knowledgeable and engaging. Let us know what you feel in the comments!