Understanding Liquidity Pools in DeFi: How They Work and Why They Matter

Liquidity pools are like the superheroes of decentralized finance (DeFi) providing much needed liquidity to decentralized exchanges (DEXs) . They’re a game changer in the world of cryptocurrency but what are they all about and how do they actually work?

Let’s break it down: How liquidity pools function in DeFi

Before we dive into the nitty gritty of liquidity pools let’s take a quick look at how things work in traditional financial markets. In traditional markets there are buyers and sellers and they negotiate prices . Buyers offer a bid price which is the maximum they’re willing to pay while sellers have an ask price the minimum they’re willing to accept . To make these transactions smooth we have market makers who hold large asset positions making it easy to match buyers with sellers . These market makers ensure there’s enough liquidity for trades to happen at agreed prices.

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