How many ways are there to make your fortune these days? Of course, we are not just talking about fiat money, but also about cryptocurrency assets. Everyone is probably familiar with staking, not just “familiar” with it, but using one way or another to store it. But have you used liquidity pools? And before we learn about their usefulness in Decimal Smart Chain, it is worth exploring the issue of liquidity. How it works and what the term means? Read on!
In simple words, a token’s liquidity is its demand on the market when neither supply nor demand outweighs the other. Therefore, a token is considered liquid when there is supply and demand for it that does not significantly affect the value of the token. For example, bitcoin is a liquid token, and its circulation in the crypto market does not significantly affect its value. Additionally, its value is determined by other parameters.
Liquidity Pools are a particular model for freezing tokens on a smart contract. Pools are, of course, not real token pools, but special contracts on a blockchain, with two types of tokens, which are provided by special liquidity providers.
Liquidity providers are users who provide tokens to the pool for swapping, in exchange for which they receive liquidity pool tokens (LP).
Liquidity Pool (LP) Tokens — these are special tokens, that act as confirmation for the providers of the tokens. That is, when a provider creates a pool, they receive this confirmation with information about the number of assets in the stack and in the future, by LP, the user can receive a reward in the form of a small commission for each swap of tokens. These tokens are stored in the wallet that was used in providing liquidity.
How do liquidity pools work?
Liquidity pools allow any user to become a liquidity provider and receive a percentage of transactions within the pool. But also, liquidity pools are a large part of DEX’s operation, allowing the exchange of tokens quickly and without third-party assistance, while not paying possible expensive fees.
What are liquidity pools for?
Because the price is determined by the ratio of assets in the pool, the user does not spend much on commissions, as can happen with regular transactions on exchanges or CEX. Moreover, liquidity pools help small projects or tokens that are not very popular, creating a kind of artificial liquidity.
A system such as a liquidity pool perfectly solves the issue of distributing assets among participants according to their invested share. For example, if several participants have created a pool, the funds received will automatically be distributed between them based on the number of tokens they have contributed to the pool.
Liquidity Pools in Decimal Smart Chain
Liquidity in Decimal Smart Chain will be implemented by hodling the DEL token in pairs with other tokens.
Let’s take DEX dels.io as an example, as decentralised exchanges with liquidity pools operate on a similar principle. That is, liquidity providers, create pools with both tokens of equivalent value to balance the pairing. Traders who want to make a swap transaction change the ratio between the tokens in the liquidity pool. But there is a direct correlation between the price in the pool and the amount of one or the other token. A buy/sell order transaction changes the liquidity ratio. The price changes as the volume of the token changes, but to keep the price in the pool, increasing the liquidity pool will help.
Liquidity pools will function on a similar principle at DSC. Liquidity providers will provide a pool with DEL token or any other Decimalchain-based token, and other cryptocurrencies, in a pair.
Liquidity pools are of interest to the cryptocurrency community, as the liquidity providers receive bonuses in the form of commissions for transactions in the pool. Users at the same time get the opportunity to trade cryptocurrency at market value and with the lowest commission, as well as, rare cryptocurrency.
In the crypto industry, you always have a wide range of options and instruments, so it is important to choose wisely, checking different sources and comparing features.