Crypto Terms:
Letter L
What is Liquidity Pool?
Meaning:
Liquidity Pool -
a pool of tokens that are locked in smart contracts and facilitate the trading on decentralized exchanges.
Let's find out Liquidity Pool meaning, definition in crypto, what is Liquidity Pool, and all other detailed facts.
Liquidity pool refers to the pool of tokens that are locked in smart contracts. They are used on decentralized exchange platforms (DEXs) to provide liquidity and mitigate the illiquidity issues of such platforms.
Liquidity pool can also describe the intersection of orders that create price levels which, after reaching a certain threshold, can see the asset decide whether to follow the trend upward or downward.
DEXs that leverage liquidity pools typically also rely on automated market maker systems. Such trading platforms use pre-funded on-chain liquidity pools for the assets involved in trading pairs rather than utilizing the usual order books.
By using liquidity pools, exchange platforms do not require the traders to decide on a given trading price for the assets. Instead, the platforms leverage the liquidity pool with the locked-in assets. Trades can occur with limited slippage regardless of the illiquidity levels of the trading pairs as long as the liquidity pool has sufficient funds.
Users providing the funds for liquidity pools can earn a passive income on their deposits via trading fees. The income is calculated based on the percentage of their contribution to the liquidity pool. Tokens that confirm a user's contribution to a liquidity pool are called "LP tokens". Users can usually withdraw their assets from liquidity pools at any time, unless there's a lockup period.
Bancor, an Ethereum-based trading platform, was among the first to implement liquidity pools for its trading. This system has since become widely used, particularly thanks to the popularity of the Uniswap exchange platform.
Note that, in liquidity pools, price changes in paired tokens might lead to potential losses. This is called an "impermanent loss". Potential factors that can influence these price changes range from supply & demand, all the way to trading volume, external market prices, or even other users participating in arbitrage.
liquidity pool<\/a> with tokens they possess<\/strong>. They do this to facilitate trading on the platform to earn passive income on their deposits.<\/p>\n<p>A liquidity provider, for example, may supply a liquidity pool containing $8,000 worth of Ether and $8,000 worth of USD-pegged decentralized <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-stablecoin/">stablecoin DAI to facilitate the trading that takes place between the two. As a result, each time a trade on the ETH\/DAI is made, <strong>the liquidity provider gets compensated for funding the pool in question<\/strong>.<\/p>\n<p>So, the percentage of the liquidity pool they provide determines<strong> how much they will get paid<\/strong>. Typically, they are <strong>obligated to fund two separate assets when funding the pool<\/strong>, to allow traders to change between one another by trading them in pairs.<\/p>\n<p><a href=https://www.bitdegree.org/"//crypto//best-decentralized-exchange/">Decentralized <\/strong>exchanges<\/a> employ automated market maker-based systems to facilitate the trading of illiquid trading pairs with minimal downtime leveraging liquidity pools. Rather than typical order book-based trading platforms, such exchanges employ money for each asset in each trading pair to permit deals to be performed.<\/p>\n<p>Although trading illiquid trading pairs on order book-based exchanges may result in significant dislocation and failure to finish transactions, liquidity providers' benefit is that trades may always be performed as long as the liquidity pools are large enough. As a result, <strong>liquidity providers are regarded as trade enhancers<\/strong> and are compensated through service fees charged from their facilitated trades.<\/p>","definition":"a user who funds liquidity pools with their personal assets.","status":"published","meta_title":"What is Liquidity Provider? Definition & Meaning | Crypto Wiki","meta_description":"Liquidity Provider meaning: Liquidity Provider - a user who funds liquidity pools with their personal assets.","meta_keywords":null}"
:prev-section="{"id":470,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Decentralized_finance#History","level":"easy","author_id":1,"created_at":"2023-06-19T06:59:00.000000Z","updated_at":"2024-01-05T05:58:13.000000Z","slug":"what-is-liquidity-mining","title":"What is Liquidity Mining?","section":"L","keyword":"Liquidity Mining","content":"<p><a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-liquidity-pool/">Liquidity pools<\/strong><\/strong><\/a> are made up of liquidity in the form of token pairs that can be accessed through <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-decentralized-exchange-dex/">Decentralized Exchanges (DEXs)<\/strong><\/a>.<\/p>\n<p>Crypto holders must contribute equivalent quantities of tokens to DEXs in terms of value. Meaning that, if you hold 4 ETH tokens and each is worth $2,500, you have a balance of $10,000. Thus, financing 4 ETH requires you to additionally supply 10,000 USDT.<\/p>\n<p><strong>Liquidity suppliers are compensated <\/strong>based on the quantity of liquidity they provide to the liquidity pool.<\/p>\n<p>The transaction fees are evenly dispersed between all liquidity providers when the deal is completed. <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-smart-contract/">Smart contracts<\/strong><\/strong><\/a> dictate what unfolds in the liquidity pool, in which every commodity exchange supported by it leads to a valuation.<\/p>\n<p>So, liquidity mining is basically a<strong> money-making approach that allows crypto holders to benefit by using their current assets instead of storing them in a<\/strong> <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-cold-storage/">cold storage<\/strong><\/a>.<\/p>\n<p>From a traditional finance (TradFi) viewpoint, brokerage houses and organizations operate as <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-market-maker-market-taker/">market makers<\/strong><\/a>, providing investors with buy and sell alternatives. Besides, they are reimbursed for the danger of keeping assets in order to supply liquidity to the market. Besides, they benefit from the gap between the bid and offer price of the asset.<\/p>","definition":"a process or practice in which participants contribute crypto assets to liquidity pools in return for fees and tokens depending on their share of total pool liquidity.","status":"published","meta_title":"What is Liquidity Mining? Definition & Meaning | Crypto Wiki","meta_description":"Liquidity Mining meaning: Liquidity Mining - is a process or practice in which participants contribute Bitcoin to liquidity pools in return for fees and tokens depending on their share of total pool liquidity.","meta_keywords":null}"
:model="{"id":478,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Market_liquidity","level":"easy","author_id":1,"created_at":"2023-06-19T06:59:00.000000Z","updated_at":"2024-01-08T03:32:13.000000Z","slug":"what-is-liquidity-pool","title":"What is Liquidity Pool?","section":"L","keyword":"Liquidity Pool","content":"<p><strong>Liquidity pool<\/strong> refers to the pool of tokens that are locked in <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-smart-contract/">smart contracts<\/strong><\/a>. They are used on <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-decentralized-exchange-dex/">decentralized exchange platforms (DEXs)<\/strong><\/a> to provide liquidity and <strong>mitigate the illiquidity issues<\/strong> of such platforms.<\/p>\n<p>Liquidity pool can also describe the intersection of orders that create price levels which, after reaching a certain threshold, can see the asset decide whether to follow the trend upward or downward.<\/p>\n<p>DEXs that leverage liquidity pools typically also rely on <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-automated-market-maker-amm/">automated market maker systems<\/strong><\/a>. Such trading platforms use <strong>pre-funded on-chain liquidity pools<\/strong> for the assets involved in trading pairs rather than utilizing the usual <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-order-book/">order books<\/strong><\/a>.<\/p>\n<p>By using liquidity pools, exchange platforms do not require the traders to decide on a given trading price for the assets. Instead, the platforms leverage the liquidity pool with the locked-in assets. Trades can occur with limited <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-slippage/">slippage regardless of the illiquidity levels of the trading pairs as long as the liquidity pool has sufficient funds.<\/p>\n<p>Users providing the funds for liquidity pools can earn a passive income on their deposits via trading fees. The income is calculated based on <strong>the percentage of their contribution to the liquidity pool<\/strong>. Tokens that confirm a user's contribution to a liquidity pool are called \"LP tokens\". Users can usually withdraw their assets from liquidity pools at any time, unless there's a lockup period.<\/p>\n<p>Bancor, an Ethereum-based trading platform, was among the first to implement liquidity pools for its trading. This system has since become widely used, particularly thanks to the popularity of the Uniswap exchange platform.<\/p>\n<p>Note that, in liquidity pools, price changes in paired tokens might lead to potential losses. This is called an \"<a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-impermanent-loss/">impermanent loss<\/strong><\/a>\". Potential factors that can influence these price changes range from supply & demand, all the way to trading volume, external market prices, or even other users participating in arbitrage.<\/p>","definition":"a pool of tokens that are locked in smart contracts and facilitate the trading on decentralized exchanges.","status":"published","meta_title":"What is Liquidity Pool? Definition & Meaning | Crypto Wiki","meta_description":"Liquidity Pool meaning: Liquidity Pool - a pool of tokens that are locked in smart contracts and facilitate the trading on decentralized exchanges.","meta_keywords":null,"author":{"id":1,"user_id":1,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2023-05-11T07:18:20.000000Z","title":"Editor-In-Chief","slug":"aaron-s-editor-in-chief","description":"<p>Having completed a Master’s degree on Economics, Politics & Culture for the East Asia region, Aaron has written scientific papers with a comparative analysis of the differences between US’ Western and Japan’s Collective forms of capitalism, 1945-2020.<\/p>\n<p>With close to a decade of experience in the FinTech industry, Aaron understands all of the biggest issues and struggles that crypto enthusiasts face. He’s a passionate analyst who is concerned with data-driven and fact-based content, as well as that which speaks to both Web3 natives and industry newcomers.<\/p>\n<p>Aaron is the go-to person for everything and anything related to digital currencies. With a huge passion for blockchain & Web3 education, Aaron strives to transform the space as we know it, and make it more approachable to complete beginners.<\/p>\n<p>Aaron has been quoted by multiple established outlets, and is a published author himself. Even during his free time, he enjoys researching the market trends, and looking for the next supernova.<\/p>","user":{"id":1,"first_name":"Aaron","last_name":"S.","email":"aaron@bitdegree.org","email_sanitized":"aaron@bitdegree.org","email_verified_at":"2023-12-01T09:40:20.000000Z","must_verify_email":false,"is_registered_with_wallet":false,"status":"active","country":"LT","last_connected_ip":"88.119.132.125","image_id":2641,"referral_token":"05TMu2NysXOCn525","referred_by":null,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2024-01-09T15:22:21.000000Z","full_name":"Aaron S."}}}"
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The Pros & Cons","status":"published","modified_content":null},{"chapter_id":2,"order":4,"slug":"coin-vs-token","title":"Coin VS Token: How Do They Differ?","status":"published","modified_content":null},{"chapter_id":2,"order":5,"slug":"what-are-stablecoins","title":"What are Stablecoins, Altcoins & Wrapped Coins?","status":"published","modified_content":null},{"chapter_id":2,"order":6,"slug":"what-is-a-bitcoin","title":"Bitcoin: the Pioneer of the Crypto World","status":"published","modified_content":null},{"chapter_id":2,"order":7,"slug":"what-is-ethereum","title":"The Ultimate Blockchain for dApp Creation: Ethereum","status":"published","modified_content":null},{"chapter_id":2,"order":8,"slug":"what-is-cardano-in-crypto","title":"What is Cardano and What is It Used For?","status":"published","modified_content":null},{"chapter_id":2,"order":9,"slug":"what-is-shiba-inu-coin","title":"Shiba Inu: the Dogecoin 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current-chapter="L"
current-section="what-is-liquidity-pool">
