Hi everyone
- I hope all hiveblog and @leofinance users are fine and enjoying their good health today I'm here to share about liquidity pools with you so let's start.
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What is a liquid pool?
- liquidity pool is the coollection of the funds locke in the smart contract. Liquidity pools are used to facilitate decentralized transactions, loans, and many other features that we will consider later.
- The liquidity pool is the backbone of many decentralized exchanges (DEX) like Uniswap. A user known as a liquidity provider (LP) creates a market by adding the equivalent value of two tokens to the pool. Instead of funding, they receive a transaction fee proportional to their share of the total liquidity of transactions made in the pool.
- AMM has made the market more accessible because anyone can be a liquidity provider.
- Banker was one of the first protocols to use the liquidity pool, but with the proliferation of Uniswap, this concept has attracted more attention. Other popular exchanges that use liquid Ethereum funds include SushiSwap, Curve, and Balancer. The liquid pools in these places hold ERC-20 tokens. The Binance Smart Chain (BSC) equivalent includes pancakes, bakery and burger exchanges, as well as BEP-20 tokens in the pool.
Liquidity pool and order book
- To understand the difference between liquid pools, let's take a look at the order book, which is a basic component of electronic trading. In short, an order book is a collection of orders currently open in a particular market.
- The system that reconciles orders against each other is called a collation engine. In addition to the matching engine, the order book is the core of Centralized Exchange (CEX). This model enables the creation of excellent complex financial markets for efficient exchange facilities.
- However, DeFi Trading involves conducting on-chain transactions without holding centralized party funds. This causes problems when ordering books. The cost of running a business is much higher, as gas charges are required for each interaction with the order book.
- This makes market makers, traders who provide liquidity to trade pairs very expensive. After all, most blockchains can't handle the throughput needed to trade billions of dollars every day.
- This means that on a blockchain like Ethereum, it is virtually impossible to exchange purchase orders on the chain. You can use a sidechain or Level 2 solution, and that's how it's done. However, the network cannot manage performance in its current format.
- Before proceeding, please note that there are DEXs that work well with chain order books. Binance DEX is based on the Binance chain and is specially designed for fast and cheap transactions. Another example is the Project Serum created on the Solana blockchain.
- Still, Ethereum has so many cryptospace resources that you can't exchange them on another network without using some kind of cross-chain bridge.
Special mention 💞
@leofinance
@khaleelkazi
@geekgirl
@lordbutterfly
Thanks for this article. I believe that bringing tech knowledge here on Hive can increase community awareness upon different areas.
Your post started very simple, but got very technical in the middle, it’s okay though.
One question, can you use Binance dex without a Binance account?
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