What is a Liquidity Pool and why should you care?
A 'Liquidity Pool' offers Liquidity to a pair of Tokens by providing a Swap Pool (smart contract) where two or more Tokens can be traded off of the open market.
The Token swap prices in the LP vary if one Token is being 'swapped for' more than the other, and this volatility enables traders to purchase Tokens at heavily reduced price. As with all trades there are risks involved and it is important that you thoroughly research every Token and trading strategy before making any purchase / swap trade.
DEFINITION : A Liquidity Pool can be thought of as a pot of cryptocurrency assets locked within a smart contract, which can be used for exchanges, loans and other applications. In traditional finance (Centralised Finance or CeFi), liquidity is provided by a central organisation, such as a bank or a stock exchange. - If you would like to learn more about LP's please read this excellent Blog Post by Alejandro Gutierrez - Operations Lead at Defactor
ABOVE - TribalDex has recently updated their Diesel Pools Front End
Important things to know about Diesel LPs
As @THGaming recently created the $SWAP.HIVE:$THGAMING LP, I will use it as an example when considering Liquidity Pools. I have highlighted important areas with Red Text.
LINK : Beeswap Front End - SWAP.HIVE:THGAMING LP
You need to add two or more Tokens to any Liquidity Pool. On TribalDex, the liquidity you stake can be removed at any stage, there is no Lock-In period.
Incentive Rewards are often given to Liquidity Providers. Rewards pools may have a high Annual Percentage Rate (APR) and offer many different reward Tokens in the same Pool.
When adding Liquidity, the Base and Quote Tokens must be staked in equal values, paired together. In the Pool above that would mean staking 50% $THGAMING and 50% $SWAP.HIVE
Total Liquidity / TVL (Total Value Locked) : the amount of Liquidity offered by LP Providers.
Swap Price : the price that you can trade the base and quote token for. At this stage you can swap 1 $THGAMING for 0.000479 $SWAP.HIVE. This price (ratio) will vary depending on LP activity and the open market price.
Rewards Pool : rewards tokens are paid every 24 hours based on the Average APR %. The more liquidity you provide, the more tokens you will earn.
https://tribaldex.com/dieselpools/pools
How to Trade / Swap Tokens in a LP
Beeswap Front End
I like using the beeswap.dcity.io/swap front end when adding liquidity or checking on LP Pool rewards, as it has detailed information displayed in each Swap Pool.
Here is a very quick explainer, with pictures, to show how easy it is to use the BeeSwap Pool. Always check the Open Market Price on TribalDex as you may be able to pick up the same Token at a cheaper price.
Select Token in wallet to trade with.
Select Token in LP to Trade for.
Select Price Slippage amount.
Hit 'Swap' at the bottom to complete the trade.
Impermanent Loss and the Risks of LPs
Using Liquidity Pools can be a very lucrative way to HODL your Cryptocurrencies as LP Providers are often given attractive rewards as incentive to keep their Tokens in the Swap Pool. However like any investment there is some risk, most notably through Impermanent Loss*, so please be sure you are confident in the Tokens you HOLD before offering them in a Liquidity Pool.
What Is Impermanent Loss?
- Impermanent loss describes the temporary loss of funds occasionally experienced by liquidity providers because of volatility in a trading pair. - Full Coinmarketcap Explanation Article here.
Whether you are an LP Provider, Swap Pool trader or thinking of creating a Liquidity Pool yourself; please invest carefully and remember that the entire crypto industry is volatile by it's very nature. Bitcoin is currently on the rise but there is always another correction around the corner, and when that happens the smaller altcoins tend to suffer. However, with risk comes reward and I highly recommend that you research LPs and other passive income generators. If you're going to hold Defi without earning a passive income, you might as well just put your money in a bank, haha!
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