Liquidity Pools on Hive are the same as Liquidity Pools in the entire crypto market! (at least in the majority of sense). This post is created though with a deliberate concentration on HIVE and how you can maximize your income passively with Liquidity pools.
In my time, It proved very difficult understanding what both Liquidity Pools and Defi meant. All the articles I read weren't very suitable for me, maybe because their explanations were solely created with advanced crypto jargon and I couldn't settle down for the life of me to read any. So then, My sole aim is to give a detailed explanation in basic words, so that anyone willing can know the ins, outs, of liquidity pools and if they wish - apply this practically on Hive and Beyond. Let's take a full dive in!
Introduction to Liquidity Pools and Defi
If a crypto noob were asked what liquidity pools meant, he/she would probably give an answer such as; Pools that contain a certain cryptocurrency in large amounts, the word liquid immediately justifies the idea in our smart human mind or say; Anything that is you know is with circulation and money flow(Exact words from my crypto noob sis). Not too far off from it, but not exactly it either.
The idea of DEFI (Fully referred to as Decentralized Finance) and Liquidity Pools in the crypto world are directly correlated to each other. In fact, Liquidity pools facilitate Decentralized Finances(Apps and Sites).
Liquidity Pools are simply digital/online pools on a Decentralized Exchange(DEX) that has two tokens of the same value at a 50/50 percent ratio that are thrown together in huge amounts, to facilitate mass trading. In such cases, a market exists where one might not AND funds are immediately available to everyone seeking them.
Defi(s) are the Exchanges that have liquidity pools built into them and charge trading fees when users like you and me exchange tokens within. Examples of popular Defi you must have heard about include; Pancakeswap, Uniswap, Cub Finance, Leo Dex, and Sushiswap.
The funds thrown into a large digital pool are made possible by people who provide their tokens directly for trading, and they are compensated through daily rewards sent out by Defi's. These people are called the Liquidity Providers.
What is DEX and CEX?
DEX refers to decentralized exchanges where the funds are not controlled by anyone, they just sit together like in a stacked pool ready to be sent for a swapping trade. This is in high contrast to what we popularly know as Cryptocurrency exchanges or CEX, i.e Centralized, like Binance, Huobi, and Coinbase. In later sections, I would give more descriptions outlining the differences between CEX and DEX so as to solidify your understanding of DEX.
Hive Blockchain Liquidity Pools;
Hive is a Decentralized Blockchain, it is built so that users on the platform are able to transact how they like without established control from a superior figure. It's a social platform on the base level, just like Instagram - On a Decentralized platform like Hive, for instance, no one can control how often you post or upvote as opposed to receiving bans when you like content too often on a social platform like Instagram. This is the core idea of Decentralization.
Hive has a couple of decentralized exchanges providing Liquidity Pools & operations, Examples are ;
CubFinance -
TribalDex -
LeoDex -
These DEX provides popular Liquidity Pools such as;
- SWAP.HIVE:BEE
- SWAP.HIVE:DEC
- DEC:SPS
- SWAP.HIVE:SWAP.USDT
- SPS:SPT
- BNB:DEC
- USDT:DEC
Now knowing this, let's take the following example;
I just earned some SPT tokens through blogging on Splintertalk, and I wanted to exchange them for SPS. There are two main ways I could go about this, (1) is by heading to TribalDex Swap's page, choosing the tokens I want to exchange for which liquidity is provided, in my case the SPS:SPT pool, then going through with it. This happens instantly, because it is a DEX and has enough funds allocated by Liquidity providers for the transaction,
Or (2) I can head to Tribal Dex Normal Exchange, select the market I want to trade in i.e SPT, choose a price to sell SPT at, create my order book, and wait for it to be completed. If I'm on a market with low liquidity(movement of supply & demand), this could take anywhere from a couple of minutes to a full day because it's centralized with people controlling the funds and my order might not clinch with anyone's price early. I would also need to further take the tokens SWAP.HIVE and purchase SPS. This is the difference between DEX and CEX, Hence we have the Liquidity Providers that make all of this possible (Uhh yeah, and some very creative developers)
Liquidity Providers, Trading Fees, and Rewards
"Nothing remains free in the world, and especially in crypto, it would do you well to re-read that!". And as such, Defi platforms and Liquidity pools aren't also free, they earn their funds from what is referred to as Trading fees, for all the comfort they bring, not only is this expected but also well-deserved.
While Defi exchanges earn from these trading fees, the liquidity providers are not left out of it, and surely, they get rewards daily for providing liquidity to pools in proportion to how much liquidity they have provided over the total availability in the whole pool (Or something like that, it's an equation, bear with me). The rewards you earn as a liquidity provider varies from DEX to DEX and you would have to check it out yourself after you make your decision. Here on Hive, you can easily check it out for each Liquidy pool available. Do that here
So there you have it, A basic guide on the whole idea surrounding Defi and Liquidity pools, how they work, and how you can earn from it. On the face of it, this can be a very lucrative investment BUT there is as always, a fraction of associated risk, let's consider that next.
What is Impermanent Loss and How to avoid it?
To explain this section deftly, I must get a little bit statistical but don't worry, it would be nothing advanced(I passively dislike advanced methods of explanation.)
Inference to explain Imperpanent loss;
Say that I have 70 Hive tokens and I want to Invest them to improve my Splinterlands SPS airdrops. There are a couple of ways I can try to achieve this, One is by purchasing more cards to add to my collection(increasing collection power), but this time I know that investing DEC tokens in Liquidity Pool guarantees me 2 airdrop points per DEC. Alas, I end up as a Liquidity provider in my 19th year on earth. What do I do?
I head to TribalDex to check how much DEC my Hive tokens can allow me to stake, I'm using the SWAP.HIVE:DEC liquidity pool, so I enter the number 35 Swap.Hive knowing that I would need to invest an equal value (not amount) of SWAP.HIVE and DEC tokens, I.e Half of my 70 Hive tokens would be exchanged into SWAP.HIVE, and the rest into DEC. I see that that comes out to 2000 DEC tokens. So I go ahead to purchase both SWAP.HIVE and DEC on BeeSwap and LeoDex respectively!
I now have 35 SWAP.HIVE and 2000 DEC Tokens, time to go all in the pool.
The job is done, so I slide to positions to confirm my tokens now in the pool, Yeah it is correct, 35 SWAP.HIVE et 2000 DEC. I rest peacefully that night guaranteed 4000 points added to my Splinterlands Airdrop points xD.
The next day, I go to check my positions again, Amiss at who stole my tokens, because what I can now see is 36.2 SWAP.HIVE and 1700 DEC(just), That right there is what is referred to as Impermanent loss
Impermanent loss:
It is called impermanent because, until I remove my token from the pool, my loss isn't permanent and it could be revised back to normal in the future following the price fluctuations of my tokens still in the pool
Conclusions
So my conclusion is this, Liquidity pools on Hive are among the best and most trusted ways I know to earn. If you think this is for you, first understand the issue of impermanent loss - this can be closest achieved by looking at the history of tokens you want to provide Liquidity for on DEX such as TribalDex and LeoDex. A more stable token would be easier to follow with less occurrence of Impermanent losses, and if at all, their revisal.
In my personal experience, because my tokens don't reduce in value but rather the value gets spread between the two tokens staked (SWAP.HIVE & DEC), I don't really care for Impermanent loss(As long as DEC isn't the one suffering loss). That's a strong hint to have in mind when deciding which pools to provide liquidity for, in my scenario, the price of DEC goes not with but against the price of HIVE and Pegged Hive(Swap.Hive), so it would likely always be stable.
Thanks for reading, and I hope this guide helps you kickstart your newfound earning streak with Liquidity Pools and Defi.
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