Understanding the Role of Liquidity Pools in Cryptocurrency Exchanges

There have been massive rise of the crypto space and this has bring up a wonderful revolution most especially in the financial systems as it has really helped to change we way we look and engaged with money in the financial system.

One of the things that has really helped the sustainability of cryptocurrency is the decentralisation exchange and the truth is those exchanges can not exist without something called liquidity pools. Most of the time, we head about liquidity pool but we did not even know how it works. Today I will actually be explaining in detail much more.

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Let me start by explaining what is liquidity pools. Liquidity pools as it were are actually the collections of funds that is done in a smart contract so as to enhance trading in the decentralised exchanges. Liquidity pool exist to actually allow the buying and selling of crypto tokens so that every trader or investors can carry out trade execution.

This makes it different from the traditional exchanges we are known with that actually worth with brokers in order for them to get their own liquidity. When it comes to the exchange most especially the decentralisation ones, they actually depends on the automated liquidity pools. Liquidity pools also work in a way that even users can add to the liquidity pool either by staking their crypto roles and in turn they earn rewards.

Let me briefly talk about the major role of the liquidity pools that work in the cryptocurrency exchange. The first is the fact that they really don't cost to enhance the decentralised trading. One of the major advantages of liquidity pool is the fact that they actually decentralised the process and so It allows peer to peer trading. This at the end of the day allows transparency in the crypto market.

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The second benefit I will like to talk about is the fact that it allows yield farming. Like I said earlier, every user can have the privilege to actually stake and earn passive income from it. With yield farming and staking, the users earn passive income and not only that but also contributing to the liquidity pool. By doing so, it even helps to encourage the participation most especially in the crypto space.

There are actually some new projects that can not drive on their own, but with liquidity pool, it actually helps to support new projects for their growth. What I mean is new tokens are possible to be listed on those decentralised exchanges without not passing through those choky procedures they will pass through if they should list on the centralised exchange.