What is Liquidity & Why is it Important? | Learn with Robi!
How are y’all doing today? Robi is here with an informative short lesson about Liquidity. You might already know a great deal, but I hope you will be able to discover something new for yourself today!
What is Liquidity?
In crypto, Liquidity means how easy and fast it is to swap one token for another and if it can be completed without causing significant impacts on the market price.
The more liquidity the project has, the easier it is to implement new products. Liquidity helps DApps invest and release new features for users to profit, expand the project’s ecosystem, and strive ahead to new developments.
Let’s take a look at Biswap, for example. First, check out how much was earned by Liquidity Providers since the launch of Biswap:
You may wonder, why is Biswap so attractive for Liquidity Providers? Well, just look at the benefits:
- Get a 50% Fee Reward
- Earn robust BSW tokens
- Enjoy high APRs on Farms
Impressive, right? I agree! Join in to take advantage of this profitable feature on Biswap! A few simple steps and you’re set:
Find more details in the guide:
Ready to move on? Now, I would like to discuss how Liquidity Pools work.
How do Liquidity Pools Work?
Liquidity Providers, Liquidity Tokens, and Automated Market Makers are crucial to understanding how liquidity pools work.
- A liquidity pool is a smart contract where tokens are locked to provide liquidity.
- Liquidity providers provide liquidity to the exchanges with the most attractive offers. For example, on Biswap, users earn 50% fee rewards and enjoy the lowest commission of 0.1% on the BNB Chain.
- AMM uses algorithms to price assets through liquidity pools to enable trading. Different protocols may utilize slightly different algorithms for liquidity pools.
Are you still here? Good, let’s keep going!
Why is Liquidity Important?
Liquidity in some crypto assets is more significant than in others. Why? It is a side effect of increased trading volume and market efficiency. Some markets might have a daily trading volume of a few thousand dollars, while others have millions.
With greater liquidity, what opportunities do users and projects (e.g. Biswap) have? Plenty! Some of them I’ve already mentioned above, and there are a few new ones:
- Profitable opportunities for users
- Extra crypto rewards
- New features and products
- Global collaborations with potent projects
- Overall progress in the DeFi ecosystem
As you can see, it’s a better idea to trade assets on exchanges with greater liquidity. Any experienced trader will warn you about the risks of entering a market with minimal liquidity, especially with significant investments. At the same time, it’s important to note that any trade is subject to slippage, regardless of its size.
What is Slippage?
Slippage is a difference between the expected transaction price and the price at which the transaction is executed. Slippage can happen at any time, but it’s most common when market orders are carried out during moments of higher volatility.
Explore 2 kinds of slippage with me:
Positive slippage occurs when the actual price for a buy order is lower than the expected price, offering traders a better rate than they requested.
Negative slippage occurs when the actual executed price for a buy order is greater than the expected price, offering traders a less beneficial rate than they requested.
❗The slippage issues will vary depending on the AMM design, but it’s something to keep in mind. It’s important to be extra cautious when exchanging pairs that don’t have enough liquidity.
We’re almost done; just one more thing!
What is Volatility?
Volatility is the measure of a price change of an asset over a certain period. It can be steady and rapid. There are two sides when it comes to volatile assets. On the one hand — more volatility can lead to higher returns. On the other hand — more volatility can lead to greater losses. The more volatile the asset is, the greater the risks.
❗Be sure to do your own research before making any considerable investments!
And we’re done with our short lesson! Kudos to you for reading to the end! I appreciate your curiosity and eagerness to learn! I hope you learned more about liquidity, its importance, and its effect on your trading.
Remember, knowledge is power. Educate yourself via the Biswap Education Hub!
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