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Everything You Need To Know About Liquidity Pools in DeFi?

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Liquidity is a term that is music to the ears of any investor. Having assets you can quickly convert to cash is a fundamental part of any cryptocurrency investment strategy.

But what exactly does it mean in the crypto space, and more importantly, what is a liquidity pool?

Read on to find out more about liquidity pools, yield farming and DeFi.

WHAT IS LIQUIDITY IN DEFI?

In traditional finance, the buyers and sellers of an asset provide liquidity. DeFi, however, relies on liquidity pools to function, and a DEX without liquidity is like a fish out of water – it just won’t survive with it.

When it comes to cryptocurrencies, “Liquidity” means how easy it is to exchange one crypto asset for another. Liquidity is critical in decentralized finance activities like yield farming, token swaps, borrowing, or lending. Swap rates of cryptocurrencies are subject to massive swings tremendously when there is a lack of liquidity to support the token’s issuance.

WHAT IS A LIQUIDITY POOL IN CRYPTO?

A liquidity pool in cryptocurrency is basically a smart contract in which assets are locked. These kinds of pools perform different functions, like lending and decentralized trading. Many DEXes are built on top of liquidity pools as a foundation. LPs (Liquidity providers) pool two tokens of equal value to create a market. LPs contribute the money and are entitled to a share of the trading fees earned from transactions in the pool. Because AMMs have opened the market, anybody may now become an LP. In the protocols that provide liquidity pools, the ERC-20 and BEP-20 tokens are often included in the liquidity pools.

HOW DOES A LIQUIDITY POOL WORK?

Put simply, a liquidity pool has two tokens, and each pool establishes a new market for the same pair of tokens. Whenever a new pool is created, the first liquidity provider sets the initial price of the assets in the pool and the provider is encouraged to provide the pool with an equivalent value of all of the tokens.

Based on the liquidity supplied to a pool, the liquidity provider gets special tokens called LP tokens in proportion to how much liquidity they supply.

Liquidity Pool Pros and Cons

Pros

Reduces the complexity of DEX trading by executing transactions at the current market price.

Gives users the ability to supply liquidity while at the same time receiving incentives, interest, or an APY on their cryptocurrency holdings.

Maintains the transparency of security audit information, making use of publicly available smart contracts.

Cons

There is a lack of centralization since the money is controlled by a limited number of people.

Liquidity providers may suffer losses because of hacker attacks due to inadequate security mechanisms.

There is a possibility of scams like rug pulls and escape scams.

There is a risk of being exposed to temporary loss.

Your assets locked up in a liquidity pool might suffer an unrealized loss when the market price changes, as opposed to holding them in your wallet.

DEFI INVESTMENT OPPORTUNITIES DONE SAFELY.

The easiest and possibly one of the most cost-effective and profitable ways to build a crypto portfolio is through yield aggregators with companies like Bolide.fi

Yield aggregators give you a way into portfolio investing and allow you to avoid many of the problems we saw above. At Bolide, we use a diversified, stablecoin basket managing the risks associated with the volatility of many coins while also using only trusted token pairs with the highest liquidity – something we monitor and control by using an automated landing protocol crush.

With Bolide.fi you can start with any amount and invest in a vast range of staking and yield farming options while choosing a risk strategy that best suits your risk appetite. Even better, there’s no lock-up period, and you can get APYs of up to 30%!

The benefits of yield aggregators and farming are pretty straightforward. If you already hold a cryptocurrency long-term, you may as well look to increase the return you can get on those holdings, and staking provides a low-risk way to generate extra returns.

Here’s a quick recap of the benefits of investing with Bolide:

– A one-stop investment product with access to leading protocols

– Automated, stablecoin investing producing maximum yields

– Low risk, market-leading yields of up to 30% APY

– Earn an extra 20% staking your BLID tokens and enjoy 11% APY on farming

– Start investing with any amount

– Hands-off, passive automated investments using your stablecoins

– No lock-up period, access your funds and profits instantly

– No withdrawal limitations

Starting your yield farming and staking journey is easy with platforms like Bolide. Simply visit Bolide.fi, connect your crypto wallet, deposit either $USDT / $USDC / $DAI or $BUSD, and you’re good to go.

Start earning interest at the speed of light with Bolide today!

For more information on LPs and DeFi investment opportunities, get in touch with Bolide.fi today.