• Press Releases
    • Submit a press release
    • Read All
  • Advertise
  • Contact us
Sensei Inu Logo Sensei Inu Logo
Bitcoinist.com
No Result
View All Result
  • Bitcoin
    • News
    • Price
    • Businesses
    • Acceptance
    • Technology
    • Investment
    • Regulation
    • Reviews
    • Gambling
      • Bitcoin Casinos
      • Real Money Slots
      • Online Casino Real Money
      • Casino utan svensk licens
    • All Bitcoin News
  • Altcoins
    • News
    • Price
    • Ethereum
    • Ripple
    • Litecoin
    • EOS
    • NAGA
    • All Altcoin News
  • Tech
    • Blockchain
    • Security
    • FinTech
  • Industry
    • Industry News
    • Press Releases
  • Price
    • Bitcoin Price
    • Ethereum Price
    • Litecoin Price
    • Binance Coin Price
  • How to
    • Buy gift cards/mobile Top Ups with Cryptos
    • What Is Bitcoin?
    • Best Bitcoin Wallet
    • Bitcoin vs Ethereum
    • Why Use Blockchain Technology?
    • Bitcoin Cash ABC vs. Bitcoin Cash SV
    • How to Buy Cryptocurrency
    • Bitcoin Mining
    • Best Bitcoin Brokers
    • Best Bitcoin Forex Brokers
    • How To Earn Bitcoin
    • What is Facebook Libra?
    • Ripple and XRP: The Complete Guide
    • Bitcoin Casinos – Where, What and How to Play
  • Events
  • Play Games
  • Play Casino Games
  • Play Finance
  • Best crypto casino
Breaking News: Breaking: Bitcoin Repayment Plan Gets New Deadline From Mt. Gox Trustee
  • Bitcoin
    • News
    • Price
    • Businesses
    • Acceptance
    • Technology
    • Investment
    • Regulation
    • Reviews
    • Gambling
      • Bitcoin Casinos
      • Real Money Slots
      • Online Casino Real Money
      • Casino utan svensk licens
    • All Bitcoin News
  • Altcoins
    • News
    • Price
    • Ethereum
    • Ripple
    • Litecoin
    • EOS
    • NAGA
    • All Altcoin News
  • Tech
    • Blockchain
    • Security
    • FinTech
  • Industry
    • Industry News
    • Press Releases
  • Price
    • Bitcoin Price
    • Ethereum Price
    • Litecoin Price
    • Binance Coin Price
  • How to
    • Buy gift cards/mobile Top Ups with Cryptos
    • What Is Bitcoin?
    • Best Bitcoin Wallet
    • Bitcoin vs Ethereum
    • Why Use Blockchain Technology?
    • Bitcoin Cash ABC vs. Bitcoin Cash SV
    • How to Buy Cryptocurrency
    • Bitcoin Mining
    • Best Bitcoin Brokers
    • Best Bitcoin Forex Brokers
    • How To Earn Bitcoin
    • What is Facebook Libra?
    • Ripple and XRP: The Complete Guide
    • Bitcoin Casinos – Where, What and How to Play
  • Events
  • Play Games
  • Play Casino Games
  • Play Finance
  • Best crypto casino
Bitcoinist.com
No Result
View All Result
Breaking News: Breaking: Bitcoin Repayment Plan Gets New Deadline From Mt. Gox Trustee

Liquidity Providers: The Good, the Bad, and Its Wonderfully Bizarre Future

Bitcoinist by Bitcoinist
1 year ago
in Industry
0

Humans and DeFi share a common trait:  They both need liquid to survive.  In the case of humans, we require water. In the case of DeFi, it requires liquid funds to facilitate trades, automated market makers (AMMs), and to expand the offerings of the platform.

But what exactly is liquidity in the context of DeFi, and why would someone be incentivized to offer it?   We’ve seen many platforms explode due to their massive liquidity pools—with more and more people signing up to become a liquidity provider.  In this article we will look at what LPs stand to gain (or lose)?  Finally, we will explore the growing number of use cases—some of which create an entirely new world for trading, such as LunaFi’s LunaBets and Pangolin’s new CrystalVale venture.

Liquidity Pools and Providers

With centralized exchanges, an “order book” style is often used for trading.  The exchange records all requests to buy and sell, working to match them up for what is essentially a Peer-to-Peer trade.  This has worked well for many, many years, but a few things have to be in place for it to go smoothly.  First, there has to be a large enough order book that buyers and sellers can operate in confidence, knowing they will find a match for at least most of their trades (at least on the coins they are trading, with oracles providing the prices).  Second, there needs to be a smooth mechanism for making trades.  This includes speed, cost, and reliability.  With crypto orderbooks, many platforms can’t offer this in a peer-to-peer format, with either the transactions per second (TPS) or the cost per transaction preventing a smooth operation.

Liquidity pools solve these problems by allowing liquidity providers (LPs) to deposit matching market rate amounts of two different coins.  These are added to the pool, which can then facilitate more and more orders as it grows.  This is the key mechanism that has created the boom of DeFi exchanges (DEXs), and billions of dollars of trade each year in the DeFi industry.

LP Benefits

So why would someone choose to become a liquidity provider?  This is a good question, and becoming an LP isn’t guaranteed to earn a yield.  However, on a quality platform, and dependent on the volatility of the tokens paired and deposited, there can be an overall yield through the combination of earning portions of transaction fees.  While HODLing could earn yield on its own thanks to rising token values, LPs can do quite well by capturing their proportion of fees earned.  Depending on your proportion contributed to the pool and the total volume of transactions, this can be very beneficial for LPs.

Using the same pool mechanism can allow LPs on a given platform to better organize for governance initiatives, pooling together their collective voice to pass or block proposed items for the platform.

LP Risks

If there were nothing but positive aspects to becoming an LP, everyone might want to do it.  However, there are some potential drawbacks to providing liquidity, mostly in the form of risks.  Because of that, an LP experience could potentially be excellent, some downsides may occur, and a number of things would need to happen at once for the experience to be devastating.

One potential burden of being an LP is the same as any other investment strategy:  You need to have excess capital to invest!  Thankfully LPs can invest very little or a great deal, so the minimum barrier is low.  They just need to be able to keep it locked up long enough to earn benefits.

The most likely risk to LPs is called impermanent loss.  If you aren’t familiar, there are a number of great explainer articles (like this one), but the key takeaway is that, due to the ratio of values for the tokens deposited, the actual yield while in the pool could be less than simply HODLing.  This however doesn’t account for the LP’s share of transaction fees, which will often make up the difference for minor impermanent loss.

The other risks for LPs are more related to any time you relinquish your tokens to a third party to manage.  If a smart contract has any type of bug or exploitable weakness, an attack from bad actors could result in the theft of an LP’s investment.  While very rare, the risk is not zero and has to be taken into account.

Countless Use Cases

Risks aside, many crypto enthusiasts have poured billions into liquidity pools in order to generate healthy yields.  While the typical use cases surround providing liquidity for DEXs, there are a number of other interesting use cases that use this same structure.  One example is LunaFi’s take on sports betting LP’s.  While most platforms want players to bet against the house, Lunabets allow users to pick a side:  player, or house.  The house is essentially a liquidity pool to help facilitate bets and payouts efficiently.  The exciting part for LPs is that house earnings are attributed to them.  This is a fascinating use case because only a transparent, gimmick-free  smart contract would allow users to examine it and see the fee structure so clearly.

Another wonderfully bizarre use case is with Pangolin’s new DaaS (DEX as a Service), which includes a swap widget that can be plugged into other platforms and access all of Pangolin’s liquidity and functionality (including limit orders) on other platforms.  Their recent partnership announcement with DeFi Kingdoms, who has included the Pangolin DaaS widget into their Crystalvale adventure game, meaning that pixelated avatars will soon be walking around Crystalvale, not only as players but as LP’s, depositing very real cryptocurrency into a pool for very real trading.  This will have some definite “Legend of Zelda” meets “Wall Street” vibes as users enjoy a very real metaverse in action.

Source:  @DefiKingdoms on Twitter

Looking Ahead

While everyone needs to do their own homework on what type of investing actions they take, what platforms they choose, and what role they’d like to play, it’s clear that LPs are here to stay, and there are a lot of good reasons for that.  We will also likely continue to be delighted with all the new use cases for LPs, their pools, and the various services they could provide with a pool-style model.  Given that more and more of this may take place in the metaverse, Casual Friday may take on a whole new meaning for DeFi.

 

ShareTweetShareShare

Sign Up for Our Newsletter!

For updates and exclusive offers enter your email.

I consent to my submitted data being collected and stored.

Bitcoinist

Bitcoinist

Bitcoinist is the ultimate news and review site for the crypto currency community!

Related Posts

8 Best Crypto Presales And ICOs For Your Watchlist – High Potential Projects

8 Best Crypto Presales And ICOs For Your Watchlist – High Potential Projects

16 hours ago
Best Online Casinos In South Africa For Gambling 2023: Top South African Casinos Updated

Best Online Casinos In South Africa For Gambling 2023: Top South African Casinos Updated

2 days ago
Best New Online Casino NZ With Real Money – Top Paying Online Casinos NZ 2023

Best New Online Casino NZ With Real Money – Top Paying Online Casinos NZ 2023

2 days ago
Beste Online Casino Nederland in 2023 – Top Online Casino’s in NL

Beste Online Casino Nederland in 2023 – Top Online Casino’s in NL

2 days ago
New Cryptocurrency Bitcoin BSC Secures $3 Million In Fundraising, Presale Hits 50% Of Hard Cap As Demand Rises

New Cryptocurrency Bitcoin BSC Secures $3 Million In Fundraising, Presale Hits 50% Of Hard Cap As Demand Rises

3 days ago
Bridging the Liquidity Gap: Orbs, QuickSwap Launch Liquidity Hub

Bridging the Liquidity Gap: Orbs, QuickSwap Launch Liquidity Hub

3 days ago
Please login to join discussion

Premium Partners

Premium Casino Partners

Play Finance

Top Casinos

Trust Dice
Trust Dice
Punt Casino
Punt Casino
mBit
mBit

Press Releases

  • VeChain (VET), Avalanche (AVAX), Polkadot (DOT) Enter...

    3 hours ago
  • Litecoin (LTC), Bitcoin (BTC), and Chainlink (LINK)...

    3 hours ago
  • Is Bitcoin still a good choice for investing? – New...

    3 hours ago
  • From DogeCoin (DOGE) Resilience to Samoyedcoin (SAMO)...

    15 hours ago
  • The Big Three: Borroe.Finance, BNB & XRP Creating...

    16 hours ago

Bitcoin news portal providing breaking news, guides, price analysis about decentralized digital money & blockchain technology.

Bitcoin

  • News
  • Price
  • Businesses
  • Acceptance
  • Technology
  • Investment
  • Regulation
  • Reviews

Altcoins

  • News
  • Price
  • Ethereum
  • Ripple
  • Litecoin
  • EOS
  • NAGA

Categories

  • Blockchain
  • Security
  • FinTech
  • Technology
  • Trending
  • Breaking News
  • Press Releases
  • How to

Pages

  • Contact us
  • Editorial Policy
  • Advertise
© 2023 Bitcoinist.com. All Rights Reserved.
  • Bitcoin
    • News
    • Price
    • Businesses
    • Acceptance
    • Technology
    • Investment
    • Regulation
    • Reviews
    • Gambling
      • Bitcoin Casinos
      • Real Money Slots
      • Online Casino Real Money
      • Casino utan svensk licens
    • All Bitcoin News
  • Altcoins
    • News
    • Price
    • Ethereum
    • Ripple
    • Litecoin
    • EOS
    • NAGA
    • All Altcoin News
  • Tech
    • Blockchain
    • Security
    • FinTech
  • Industry
    • Industry News
    • Press Releases
  • Price
    • Bitcoin Price
    • Ethereum Price
    • Litecoin Price
    • Binance Coin Price
  • How to
    • Buy gift cards/mobile Top Ups with Cryptos
    • What Is Bitcoin?
    • Best Bitcoin Wallet
    • Bitcoin vs Ethereum
    • Why Use Blockchain Technology?
    • Bitcoin Cash ABC vs. Bitcoin Cash SV
    • How to Buy Cryptocurrency
    • Bitcoin Mining
    • Best Bitcoin Brokers
    • Best Bitcoin Forex Brokers
    • How To Earn Bitcoin
    • What is Facebook Libra?
    • Ripple and XRP: The Complete Guide
    • Bitcoin Casinos – Where, What and How to Play
  • Events
  • Play Games
  • Play Casino Games
  • Play Finance
  • Best crypto casino

© 2023 Bitcoinist. All Rights Reserved.

This website uses cookies. By continuing to use this website you are giving consent to cookies being used. Visit our Privacy Center or Cookie Policy.