The blockchain ecosystem has a lot of new vocabulary and acronyms to learn for someone that’s only just recently entered the space. From ICOs to launchpads and more, it’s easy to get confused when you’re just getting started.
One of the most common words that a user of cryptocurrency will run into is liquidity. It is commonly used both in the context of a certain project needing liquidity and users being able to supply liquidity into a pool. Alongside helping you understand, knowing what your options are when it comes to supplying liquidity can also be an incredibly prosperous opportunity.
Currently, it’s estimated that there is over $108.4 billion USD locked away in DeFi liquidity pools, demonstrating the already huge amount of money that’s being siphoned into this field. By understanding liquidity, you’ll be in the prime position to start taking advantage of it, turning your wallet cryptocurrency into a stream of passive income.
In this article, we’ll be breaking down liquidity, bringing you up to speed on staking pools, and highlighting some of the most prominent new projects in this field that you can take advantage of.
Let’s get right into it.
What is Liquidity in Blockchain?
Both in blockchain and wider financial systems, liquidity is the generic measurement of how easily one asset can be instantly changed into another. The only distinction is that this change must happen without the asset impacting the current market price. A market that has low liquidity is likely to suffer from very volatile asset prices, market manipulation, and general corruption.
On the other hand, good market liquidity means that value can be transferred incredibly quickly, reducing market volatility, creating quicker transaction speeds, and ensuring a reliable market for all of its users.
How Can I Get Involved in Liquidity?
When a cryptocurrency is new, there is almost no liquidity associated with the coin, making this a bad market system that’s open to market manipulation.
To combat this, DeFi institutions have flocked to opening liquidity pools – which is where users can supply their coins to the market (providing liquidity) in return for a fixed yield over time. This helps a cryptocurrency stabilize its market, while also returning a reward to the investors that are providing this stability in the form of liquidity. The average yield moves between around 5-15%, but some projects have offered over 100% annual yields.
Staking cryptocurrency is the action of moving your money into one of these many DeFi liquidity pools, turning it into a passive stream of income as the network rewards you for helping them increase liquidity. This has become such an art in the crypto community that there are now groups known as yield farmers that seek the liquidity pools with the very best yield options.
What’s more, some companies also offer users the ability to gain more of their own native token by participating in liquidity pools. For example, within the t3rn project, users are able to get TRN tokens by providing liquidity to projects. This dual approach allows users to gain passive income through staking currency, while also offering the additional benefit of getting native tokens.
With these tokens, they can then cover fees on the platform, helping to increase their returns to a greater extent. Many projects are using this dual approach, helping to reward their customers while also providing an easy way to distribute their own native tokens to a wider audience within the community.
Further Group Pool Applications
The ability for one user to get more than just a singular token out of a liquidity pool, and the surrounding benefits of this feature, is a feature that many projects have taken advantage of for partnership links. This is when two different companies create a liquidity pool, with those that provide this liquidity being rewarded in both tokens.
Not only does this provide a wonderful opportunity for both projects to promote their tokens, but it allows users to get even more from the cryptocurrency that they provide to the pool. A great example of this is the partnership between LunaFi and SX Network. By constructing a shared pool, both of their customers are set to benefit when either one of their communities enters the pool on SharkSwap.
Excited to announce our partnership with @SX_Network! $600k to be added to @SharkSwap_xyz DEX on IDO & looking forward to airdropping SX community $100k LFI
#WAGMI
— LunaFi (@LunaFi_Project) May 6, 2022
This partnership after LunaFi has already been pushing the bounds of what liquidity pools can provide to users. Instead of a traditional model, LunaFi brings gambling to decentralized finance, providing a fair environment that is completely trustless in permissions. By adding to liquidity house pools within this system, users are then additionally rewarded with a share of the profits from these gambling ventures, essentially giving customers the power to become the gambling house itself.
LunaFi is a wonderful example of how liquidity pools continue to be revamped and redesigned to offer the best possible benefits to a project’s audiences. As there are now so many different liquidity pools available to investors, companies are continually trying to push the bounds of what they can offer to give consumers the very best deals.
Final Thoughts
Liquidity pools account for millions upon millions of USD locked away into cryptocurrency systems. While providing a stable market to a certain cryptocurrency, it also benefits the user by rewarding them with a continual stream of passive income from their assets.
This symbiotic relationship has become very popular over recent years, with cryptocurrencies needing liquidity and users being there to supply it. The development of this industry has led to yields becoming more competitive, increasing interest and spurring developments from companies that are always looking to beat out their competitors and offer that little bit extra.
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