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You have probably come across this term liquidity pool a lot in the last couple of weeks. What is it you might be thinking and why is it a big deal. As you can probably tell by the name you are creating a pool two assets that can be traded for each other in order to provide liquidity for one or both of those assets. This allows for people to trade between them on the fly as they are available when someone wants to trade. This is very similar to a market but instead of buyers and sellers you have lenders and swappers. I do not need to wait for someone to take my order like I do on the market, when I use a liquidity pool I can use one asset that I own and swap it for another without having to wait.
But why is this a big deal?
Big assets might not need these pools but small to medium products do. Lets take a coin like Leo. It is a great coin with a product behind but it doesn't have the name power of ethereum (yet). If you want to buy it you need to use a dex that is on the Hive chain, which also doesn't have the same attention as ethereum. This makes it hard to attract users outside of Hive to use Leo and it makes it hard to get or sell Leo as we are limited to the dex. But if you had a pool on the ethereum chain people could trade their ethereum for Leo and this brings more attention to the coin. If a lot of people start to do this there is now more attention for Leo and we can grow outside of the circle we are currently in.
It is not only ethereum that we can swap for. When you want to make a liquidity pool you start by taking two coins and having them trade for each other. EVERY POOL NEEDS TWO COINS. You cannot add coins into a pool if you don't add a pair with it. This means that you need the same $ value of eth and leo if you are going to make them a pair. When you create the pool more people can add to that pool to grow it. The reason people would do this is they get a piece of the fees for every swap made from the pool. The bigger your stake in the pool the higher your percentage. So you can now park your assets in a pool and get a return for them as long as people trade the pool. But it can be any two assets on the eth chain (or tron chain) if you choose. All you have to do is create the pool, add the assets and hope that people swap between the two so you can get an increase from the fees.
This also leads to the dangers of people putting up fake pairs and scam coins so please be careful. I have seen bitcoin being swapped for coins on a chain that wasn't bitcoin. There is also people making a coin and telling people to swap for it only to dump that coin when the value goes up (like icos in 2017). If you are going to swap your coins or add coins to a pool make sure it is two coins you have trust in and that the coin is the coin you actually think it is.
This new tool of decentralised finance can help new companies get liquidity for their product and help investors get an roi on their coins just for parking them in a pool. There are risks as people are free to misuse the product, but the product itself does have legit merit when used honestly. As the team of Leo has stated it is in the hopes of using liquidity pools that we can bring in users from the eth network and show exchanges like Binance that people are interested in us.
Oh and in case you didn't know LP is just short for liquidity pool, that comes up a lot as well.
Posted Using LeoFinance
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Posted Using LeoFinance Beta