What is a liquidity pool?
A liquidity pool is a collection of tokens held in a smart contract, a self-executing program based on the buyer and seller’s agreement terms. The pool facilitates cryptocurrency trades by offering liquidity to users.
The ease with which one token can be exchanged for another is liquidity. Users can trade in numerous cryptocurrencies using liquidity pools. Liquidity pools are virtual marketplaces where businesses can sell and profit. They are indispensable for firms launching Initial DEX Offerings (IDOs) on decentralized exchanges.
How do liquidity pools work?
By utilizing the automated market maker (AMM) mechanism, liquidity pools serve as the backbone of DEX. The AMM is a framework in which investors, or “liquidity providers” (LPs), add equal amounts of stablecoins and cryptocurrency coins to the pool — for example NEAR/USN.
People can exchange one stablecoin for another by exchanging the equivalent amount of NEAR for USN. DEX buyers and sellers benefit from LPs since they are given tokens that are easily traded within the identical blockchain.
What is liquidity farming?
The process of leveraging decentralized finance (DeFi) to maximize profits is known as liquidity farming (Yield farming). On a DeFi platform, users lend or borrow cryptocurrency in exchange for another cryptocurrency.
Liquidity Farmers that want to boost their liquid flow can use more sophisticated strategies. Liquidity farmers, for example, can continually transfer their cryptos between several loan platforms to maximize their profits.
How does liquidity farming work?
Liquidity farming is a method of earning money by investing in a decentralized application or dApp. Liquid farmers use decentralized exchanges (DEXs) to lend, borrow, and stake coins to earn interest and speculate on price volatility. Smart contracts, which automate financial agreements between two parties, make liquid farming possible via DeFi.
As decentralized platforms continue to grow, liquidity pools and farms will become an integral part of the everyday lexicon of startups and traders.
(written by Catherine S Thomas)
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