What happens when a crypto unlocks its liquidity pool? This is the question that Yaad Finance will be trying to answer for you as straightforward as possible. Before going further, let us define what a Liquidity Pool is and Why are Liquidity Pools are necessary.
What is a Liquidity Pool?
A simple definition would be that a liquidity pool sets aside a certain amount of currency to facilitate trade, swap, and movement between crypto coins and traders on a decentralization exchange. The more complex definition is that Liquidity Pools allow decentralized crypto exchanges to compete with centralized exchanges without any middleman.
How do Liquidity Pools work?
A liquidity Pool sets aside a sum of cryptocurrency locked away in a smart contract. “Essentially, users pool their assets in a DEX’s smart contracts to provide asset liquidity for traders to swap between currencies. Liquidity pools provide much-needed liquidity, speed, and convenience to the DeFi ecosystem.” Gemini. Liquidity pools incentivize liquidity providers to stake their crypto for rewards to ensure that liquidity is guaranteed. They receive a percentage of trading fees and rewards by staking their coins.
Why are Liquidity Pools Necessary?
Liquidity pools are necessary because they maintain order and consensus in the buying and selling of cryptocurrency and Decentralized Exchanges without confusion. It ensures that buying and selling prices are reflected or honored and maintained even in volatile markets. Hence, cryptocurrencies are traded 24 hours a day because there are liquidity pools that maintain the price of buying and selling and ensure that consensus is maintained throughout the ecosystem.
What happens when a crypto unlocks its liquidity pool?
When crypto unlocks its Liquidity Pool, the very stability of the currency is put at stake, even more so if done without warning. Locking a liquidity pool ensures that the coin remains stable and tradable at all times. If it is unlocked, the coin developers can take off with all the currencies known as a “rug pull.” Investors in this particular cryptocurrency could find themselves holding the bag to a valueless token plummeting towards zero dollars in value. However, this is a worst-case scenario which is more likely in the meme cryptocurrency that pops up every now and then.
In conclusion, it’s crucial to invest and provide liquidity to credible cryptocurrencies with a utility like Ethereum. Also, remember that most people investing in and trading cryptocurrencies right now are in it to make money, making the crypto market very volatile. So as you are out there investing and trading, make sure to manage your requests.