The crypto industry is so dynamic with many innovations popping up every quarter of the year. Most of these are ways to make money in the space. One of these new technologies turning things around is known as decentralized finance which runs on the Ethereum blockchain. It enables saving and lending of money via the blockchain utilizing smart contracts to offer traditional banking services. Liquidity pools enable setting aside a chunk of digital assets for future trading.
Over the years, lending and saving of money were centralized, the emergence of decentralized finance proved saving and lending can be done outside the normal banking platform. Decentralized finance offers the opportunity for investors to provide crypto assets that are kept to enable trading of trading pairs on decentralized exchanges. The asset kept for trading is known as the liquidity pool.
What is a Crypto Liquidity Pool?
A liquidity pool is a collection of crypto assets funds locked in a smart contract. The locked asset is traded from time to time, in exchange for funds provided providers earn trading fees for trades that happen in their pool, in proportion to their share of the total liquidity.
The liquidity pool is different from the order book, which collects currently open orders in a given market. The order book is the main tool by the centralized exchanges to create complex financial markets and enable efficient exchange. Liquidity pool works for decentralized exchanges (DEXes) just as order book works for centralized ones.
How Does Liquidity Pool Work?
A liquidity pool is similar to an order book. In a peer-to-peer exchange,
the order book connects buyers and sellers with trade happening directly between the two user’s wallets. The DEXes platforms function as Automated Market Makes, and trading is done differently. In this case, trading is done in a peer to contract mode.
Liquidity providers deposit a chunk of funds that are locked away in the smart contract. Trade is executed on an AMM without a counterparty unlike where there is an order book. In this case, you are initiating a trade against the liquidity in the liquidity pool. A buyer doesn’t need a seller to buy at that very moment of the trade, what he needs is sufficient funds in the pool to execute a trade.
The Best Liquidity Pools to Grow Investment
Now that you understand what the liquidity pool is and how it works, you may want to look out for a good one to invest in. We have researched and picked the best ones to grow your investment.
Uniswap is a decentralized cryptocurrency exchange that enables transactions between crypto tokens on the Ethereum blockchain using smart contracts. It is a network of computers that runs on the Ethereum blockchain which enables users of Ethereum wallet to exchange without the involvement of any controlling party. It allows trustless token swapping with the help of unicorns, traders can exchange ERC20 tokens without trusting anyone with their funds.
Uniswap is a decentralized Ethereum based protocol that enables users to trade any ERC20 token using the liquidity pools. Though it has its native token, Uniswap utilizes a liquidity pool of ERC20 tokens powered by smart contracts.
It is regarded as the highest performing Defi pool, according to a recent report, a total value of about $2.6 billion is locked on Uniswap. It allows users to remove or add liquidity.
Uniswap liquidity pool is open, the players or market makers control the exchange rate, can fix it at a certain rate. The mechanism used by the market makers can cause the rate to shift during the trading process, creating opportunities for more trades.
Several liquidity pools are existing in Uniswap, such as your, yTUSD, yUSDC, AD, yUSDT, WETH–AMPL, LGO-WETH, and more. The trading process on Uniswap enables users to deposit crypto and get the same value of Uniswap token in return. For instance, when a user deposits USDT, he will get its equivalent in Uniswap token.
Aave Liquidity Pool
Aave is an open-source protocol that enables users to deposit digital assets into liquidity pools, earn interest, and borrow digital assets through an over-collateralized loan. Users can borrow digital assets at a stable rate. Borrowing through an Aave flash loan requires no collateral. However, the uncollateralized loans are subject to repayment, in case of any default, Aave reserves the right to reverse the transactions.
There is much more liquidity in the Aave market pool, with liquidity pools set up on other Defi platforms such as Balancer and Uniswap, it is easy to deal with liquidity issues.
Aave protocol holds about $1.14 billion in total valve locked (TVL) in its pools. It is viewed as one of the best-performing Defi lending pools across the globe. Every asset traded on the Aave pool has a separate loan-value parameter that determines the collateral ratio. Its platform offers borrowers a rate switching protocol that allows users to switch between variable and stable interest rates.
Curve Pool on Yearn Finance
The Curve is a decentralized exchange liquidity pool on the Ethereum network. It was designed to swap stablecoins or provide liquidity to Curve pools and earn fees. It is like Uniswap because it uses liquidity pools but costs less to use since its main focus is on stablecoins. It rewards its providers, eliminates the problem of high fees, spillage, and occasional losses by focusing on assets of similar nature.
Curve holds about $1.05 billion in total valve locked (TVL) and it is viewed as one of the best performing Defi lending pools globally. Though it does not have its token yet, it is rumored Aave has plans to launch its token CRV.
While Curve focuses mainly on Stabelecoin, out of its seven pools, 2 are for tokenized Bitcoin or Bitcoin-on-Ethereum, the other 5 are for Stabelecoin.
Yearn finance which was newly cryptocurrency launched in July 2020 is also known as yEarn. A group of protocols running on the Ethereum blockchain enables users to grow their earnings in crypto assets by lending and trading.
Yearn created Curve’s Y pool, a Defi lending pool with a market cap of over $423 million, to increase APY for liquidity providers. Curve pool on yearn finance enables users to take advantage of several yield farming options. This pool consists of high-rated Stablecoins such as USDT, DAI, USDC, TUSD. When liquidity providers deposit DAI, they get yDAI that they can supply to Curve. Users can earn trading fees together with yield rewards.
Defi ecosystem is transforming the crypto industry, lending and trading on these platforms generate higher revenue for traders. Investors in Defi projects would be looking at an annual profit of 79.9 percent. Some of its liquidity pools can offer high-interest yields, investors earn much more interest lending out crypto. Investing in Defi lending is very rewarding, it would be more rewarding to invest in the best-performing lending platforms.