The blockchain ecosystem has a lot of new vocabulary and acronyms to learn for someone who has only recently entered the space. From ICOs to launchpads and more, it’s easy to get confused when you’re just starting out.
One of the most common words that a cryptocurrency user will come across is liquidity. It is commonly used both in the context of a specific project that needs liquidity and when users can inject liquidity into a pool. As well as providing better understanding, knowing what your options are when it comes to providing liquidity can also be an incredibly rewarding opportunity.
It is currently estimated that it is over $108.4 billion locked in DeFi liquidity pools, demonstrating the already huge amount of money being pumped into this field. When you understand liquidity, you are in the best position to use it and turn your wallet cryptocurrency into a stream of passive income.
In this article, we’ll break down liquidity, update you on staking pools, and highlight some of the most prominent new ventures in this space for you to take advantage of.
Let’s get straight to that.
What is liquidity in blockchain?
In both blockchain and broader financial systems, liquidity is the generic measure of how easily one asset can be instantly converted into another. The only difference is that this change must be made without the asset affecting the current market price. A market with low liquidity is likely to suffer from highly volatile asset prices, market manipulation and general corruption.
On the other hand good market liquidity means value can be transferred incredibly quickly, reducing market volatility, creating faster transaction speeds and ensuring a reliable market for all of its users.
How can I participate in the liquidity?
When a cryptocurrency is new, there is almost no liquidity associated with the coin, making this a poor market system prone to market manipulation.
To counter this, DeFi institutions have flocked to open liquidity pools – where users can make their coins available to the market (provide liquidity) against a rate of return fixed over time. This helps a cryptocurrency stabilize its market while also rewarding the investors who provide that stability in the form of liquidity. The average return ranges between around 5-15%, but a few projects have come up over 100% annual return.
Cryptocurrency staking is the action of moving your money into one of these many DeFi liquidity pools and turning it into a passive income stream as the network rewards you for helping it increase liquidity. This has become such an art in the crypto community that there are now groups known as yield builders seeking the liquidity pools with the very best yield options.
In addition, some companies also offer users the opportunity to get more of their own native token by participating in liquidity pools. For example within the t3rn Project, users can get TRN tokens by providing liquidity to projects. This dual approach allows users to earn passive income by staking currencies while providing the added benefit of receiving native tokens.
They can then use these tokens to cover fees on the platform, helping to increase their returns more. Many projects use this dual approach to reward their customers while providing an easy way to distribute their own native tokens to a wider audience within the community.
Other group pool applications
The ability for a user to receive more than just a single token from a liquidity pool and the associated benefits of this feature is a feature that many partnership connection projects have leveraged. This is when two different companies create a liquidity pool, with those who provide that liquidity being rewarded in both tokens.
Not only does this provide a wonderful opportunity for both projects to promote their tokens, but it allows users to get even more out of the cryptocurrency they are providing to the pool. A good example of this is the partnership between LunaFi and SX Network. By building a shared pool, both customers will benefit when one of their communities joins the pool on SharkSwap.
https://t.co/fpyhowXkQe
We’re excited to announce our partnership with @SX_Network! $600,000 will be added to @SharkSwap_xyz DEX on IDO and we look forward to dropping $100,000 LFI 🚀 #WAGMI out of the air for the SX community
— LunaFi (@LunaFi_Project) May 6, 2022
This partnership after Luna Fi has already pushed the boundaries of what liquidity pools can offer users. Instead of a traditional model, LunaFi brings gambling into decentralized finance and offers a fair environment that is completely trustworthy in terms of permissions. By adding liquidity house pools within this system, users are additionally rewarded with a share of the profits from these gambling companies, essentially giving customers the opportunity to become the gambling house themselves.
LunaFi is a wonderful example of how liquidity pools continue to be redesigned and redesigned to deliver the best possible benefits to a project’s audience. With so many different pools of liquidity now available to investors, companies are constantly trying to push the boundaries of what they offer in order to offer consumers the best deals.
Final Thoughts
Liquidity pools make up millions and millions of USD locked in cryptocurrency systems. While it offers a stable market for a particular cryptocurrency, it also benefits the user by rewarding them with a continuous stream of passive income from their wealth.
This symbiotic relationship has become very popular in recent years as cryptocurrencies require liquidity and users are there to provide it. The evolution of this industry has meant that returns have become more competitive, interest has increased and developments have been driven by companies always striving to beat their competitors and offer that little bit extra.
Released May 16, 2022
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