Staying up to date with the recent changes in the cryptocurrency market is mandatory. Especially if you do not want to miss crazy investment opportunities that keep popping up into the market now and then. The concept of decentralized finance or Defi is also one of those new entities for the ecosystem. Introducing the concept of liquidity pools to crypto investors, it’s changing the crypto trading experience completely.
However, many people are not aware of how liquidity pools work and why they should use them. Holding you back from getting the most out of their digital investments, understanding how they work will help you for sure. Therefore, we have created a complete guide to help you get started with liquidity pools!
What Are Liquidity Pools? Top 5 Liquidity Pools Worth Choosing
What are liquidity pools?
Liquidity pools are a collection of tokens that are locked using a smart contract system that executes automatically. Making the trading process much more convenient when compared to other methods. You can think of liquidity pools like a stable market that guarantees to allow crypto trading to its participants.
Most commonly running in a decentralized environment, liquidity pools are gaining popularity among investors recently. Not to mention they are popular due to their behavior which doesn’t affect them from external elements like market changes or any major events. So it is nothing new that DEXs platforms are shifting the trading process to major liquidity pools.
How do liquidity pools work?
Understanding how do liquidity pools work is not as important as understanding how to use them. But having enough information regarding the platform is always a plus point in terms of huge investments. Hence, if you wish to know how they work then don’t worry.
If you have ever completed a trade on a centralized exchange, you may be aware of the common issues you need to face with them. For instance, you are trying to sell DOGE at the best price possible but there are not many people who are willing to buy it at a higher price due to market conditions. In this situation, your trade will eventually fail and you may even have to sell it at a much lower price if it’s urgent.
The same goes with the case if you wish to buy DOGE at a lower price. However, it is not the same when it comes to liquidity pool trading. And the sole reason behind this difference is that crypto pair prices are regulated on liquidity pools in a different way. Because there are people who are always ready to buy your digital assets at a predefined price, while backed up by the liquidity pool itself.
Following the concept of MMA (Market Maker Algorithm) each liquidity pool includes two basic tokens in order to work efficiently. Making it obvious that the total supply for these two tokens is not affected on a large scale, liquidity pools are capable of completing transactions with a very high amount too. Not to mention the trade pricing will get affected according to the algorithm rules and regulations.
Top 5 liquidity pools worth choosing
Entering the world of liquidity pools sounds interesting, but your choice of the liquidity pool can affect a lot of other things. Hence, we have cut down the lengthy process of researching and finding a suitable platform to start. You can go through these liquidity pools that provide the best service in the market at the moment along with cryptocurrency tracker service.
It is much likely that you haven’t heard of this platform yet. Zerion was Founded in 2016 by Evgeny Yurtaev, Alexey Bashlykov, and Vadim Koleoshkin. Supporting 60+ Defi protocols, the minimal design of the user interface is quite impressive and easy to learn.
Not to mention it directly works with web3 wallets so it doesn’t store the private keys or assets on its servers. Ensuring asset security and lowering the trading risks for everyone, Zerion does a great job while keeping your personal information secure from third parties as well.
A lot of crypto traders and interested individuals are shifting to this new and powerful platform lately. Entering the market during September almost a year ago, Sushuswap is originated from Uniswap as a fork. With an aim to expand the use cases for the AMM-based liquidity pools, the Sushiswap is gaining popularity rather quickly when compared to others.
It goes without saying that the platform is empowering the decentralized trading of Defi tokens more effectively. While rewarding the pool participants with the native token known as Sushi at the same time for participant encouragement.
3. Kyber Network
Being one of the new Defi protocols in the market, the Kyber Network is surging up in value without a doubt. Not to mention its native cryptocurrency is acquiring a lot of investments lately due to the price hikes and higher ROI. Launching into the market in 2017, the Kyber Network platform is a liquidity infrastructure for decentralized finance.
Kyber network works as a middleman for those people who wish to buy different cryptocurrencies at the best price. As it integrates the liquidity for the best trading experience, it works as a liquidity hub for its users. Not to mention it provides the first Dynamic Market Maker concept with the latest protocol for increasing your profit margin.
Now talking about one of the most popular Decentralized liquidity pools in the market, Uniswap is the reason behind the public attention Bancor received. Allowing its users to trade any ERC20 tokens hassle-free, Uniswap is a very popular platform among the liquidity pool users around the globe.
Therefore, it allows you to exchange ETH for any token that runs on an ERC20 smart contract system. Rewarding users with its native token UNI, the platform works similarly to other liquidity providers. Not to mention the platform is based in New York and provides the services while following a Product Market Model (PMM).
5. Bancor Liquidity Pool
Being the pioneer of the liquidity pools concept, Bancor was the first platform ever to implement a liquidity pool successfully. Entering the market in 2016, Bancor is a Switzerland-based trading platform that works in a decentralized environment.
With its liquidity pool “Bancor Rely” the platform is offering quality services for a long time now. Allowing the users to increase the liquidity of the pool and earn rewards from the transaction fees and similar methods as compensation. You can choose it without any further investigation at all.
Pros And Cons Of Using Liquidity Pools
- Affordable gas fees
- Using the platforms is rather easy
- Everyone can earn from them
- You may have to face system related problem
- Smart contracts may have bugs
- Comparatively new for beginner traders
Whether you are an experienced trader or just starting as a newcomer in the crypto trading field, using liquidity pools is easier than you think. Unless you still have not completed your first crypto trade yet, it won’t take you long to understand the concept of liquidity pools.
Despite the possible drawbacks of liquidity pools, they are one of the effective investment strategies for cryptocurrency. That you can use to earn money for staking your assets. As the platforms give assurance to the participants regarding the liquidity, it is an option with low risk and higher potential. Do share this informative guide with others and feel free to ask any questions in the comment section below.