How DeFi Liquidity Pool Works

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What is a Liquidity Pool?

To understand what “liquidity pool” is, you need to first understand the meaning of the word “liquidity”.

How Do Liquidity Pools Work?

Liquidity pools work by rules. One of the rules is that the total dollar value of both asset types locked in the smart contract must be the same.

Why Use Liquidity Pools?

As a crypto trader, Defi liquidity pools give you access to a never-ending supply of liquidity where you can easily trade, borrow and lend your cryptocurrency.

What are the Risks Involved in Liquidity Pools?

One of the risks involved in the liquidity pool is that the smart contract holding the funds is prone to bug or code errors. This can give cybercriminals the opportunity to steal funds that might never be recovered.

Final Thoughts

Apart from being core technologies behind decentralized finance, liquidity pools make decentralized trading, and lending possible. Liquidity pools hold to the rule of token value equality to ensure pool balance, they work using the AMM model, provide faster liquidation of assets, and reward investors with pool tokens. Although they offer crypto traders a vast supply of liquidity, there are still some risks associated with the smart contracts that power the DeFi ecosystem. DeFi liquidity pools are what make DeFi unique and accessible.

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