What are Liquidity Pools?
In simple terms, a liquidity pool is a big digital finance pool where people throw in their money for a common desired end. This has become the basis of the recent decentralized finance (DeFi) trend that has created a new series of online banking networks, now said to hold $45.38B in locked funds, according to DeFi Pulse.
Liquidity pools form the basis for many decentralized exchanges. Investors who donate to the pool are called liquidity providers. They add tokens into the pool and earn trading fees for their share of total liquidity.
What Can Exchange Liquidity Pools Do?
There are lots of exciting applications for liquidity pools. One of them is the automated market maker (AMM). This application takes advantage of the fact that pools count on a certain amount of funds that have been locked into the protocol and uses these funds to facilitate trading transactions. It relies on an algorithm that continuously recalculates the price of the assets through a predetermined mathematical formula and makes them available to traders.
In this case, trades are done directly with the protocol instead of having a buying trader wait for a match with a selling trader, or vice versa. The traditional interaction of a buyer and seller doesn’t exist and instead, everyone can participate directly.
Yield Farming is another such application that gives crypto owners power to lend their tokens through smart contracts to earn rewards in return. This is only possible at decentralized exchanges where protocols allow yield farmers to move funds a lot in search of high yield.
Another interesting application that has popular signage is blockchain gaming. This movement is intended to remove the monopoly of game developing companies over the creation of game rules and give control back to gamers.
Typically, a game would have related data on a set of servers that are controlled by game administrators. Through blockchain gaming, valuable in-game assets such as collectibles and virtual money are made accessible for gamers who can trade them among themselves. The advantages of blockchain gaming include in-game payments getting more streamlined, the creation of a more flexible gaming multiverse, and so on.
Who are HODLers?
What started as a drunk person’s typo while describing the eagerness to hold on to a cryptocurrency became a meme for an entire generation of crypto traders. HODLing is an investment strategy called buy-and-hold where investors will hold on to their assets for an extended period of time irrespective of their current value in anticipation that their perseverance will be rewarded in the long run.
The ‘I AM HODLING’ post was a response to Bitcoin’s drastic price plunge in 2013 from $716 by 39% to $438 in mid-December. The author of the post, ‘GameKyuubi’, is said to have made the right decision as the value of Bitcoin has risen to an all-time high of more than $60,000 in 2021.
By now, there are better ways to invest in blockchain and cryptocurrency technology. Providing a liquidity pool can be considered a new way to HODL. One where, instead of simply holding on to a cryptocurrency, investors can reap benefits from these AMM, Yield Farming, or gaming protocols.
Traders Still Prefer Traditional Exchanges
However, professionals might prefer more straightforward and full-featured applications when it comes to intraday trading. Just as new strategies for long-term investors have sprung, traders now have platforms such as Wisebitcoin that offer opportunities that improve upon traditional financial services.
While the novel idea of liquidity pools works well for HODLers, the fast-paced world of professional trading requires more efficient mechanisms. An exchange such as Wisebitcoin is able to combine the liquidity of over 280 cryptocurrencies thanks to its cloud integrations. Furthermore, it offers traders important features such as 100X leverage on contract trading, leveraged ETF tokens on spot trading, and an Insurance Fund for perpetual swaps. All of which is not easily maintained by protocols that focus on liquidity pools.
It might well be the case that liquidity pools are the better options for HODLers while cloud-integrated exchanges such as Wisebitcoin are the go-to choice for professional traders. It’s the coexistence of these that can drive cryptocurrency markets forward by providing for every need.