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  1. Cryptonomics

Liquidity pool

From gemini.com:

"A liquidity pool is a crowdsourced pool of cryptocurrencies or tokens locked in a smart contract that is used to facilitate trades between the assets on a decentralized exchange (DEX). Instead of traditional markets of buyers and sellers, many decentralized finance (DeFi) platforms use automated market makers (AMMs), which allow digital assets to be traded in an automatic and permissionless manner through the use of liquidity pools"

Smart contracts that allow traders to trade assets/token/coins without the necessary need of constant demand/buyers. Further, these trades can be done despite the time of day / prices of the asset.

  • Liquidity pools are nothing but smart contracts that hold funds and do some operation with the funds that they are provided with.

Most liquidity pools use an algorithm, which is usually of the sort: Constant product automated market maker (AMM's for short)

Liquidity pools provide an incentive for investors by giving LP (Liqudity pool) tokens, which can be interpreted like a share of the given liquidity pool. These tokens can then be used to be traded, staked, etc.

In order to get the liquidity back, the amount of LP tokens must be given back (for burning).

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Last updated 2 years ago