Updated: Jun 30
Liquidity used to be a key concern for decentralized exchanges (DEXs) on Ethereum. Adding funds to a liquidity pool may seem like a straightforward process, but navigating crypto pairs can be complex and time-consuming, especially for DeFi newbies. Platforms like AlgoBlocks remove these manual steps so investors can focus on more important things.
Liquidity pools are the core technology behind the decentralized finance (DeFi) ecosystem. These pools are basically a crowdsourced collection of tokens or digital assets that are locked in a smart contract and help to facilitate trading, yield farming, blockchain gaming, and other DeFi activities.
Most DeFi platforms would use automated market makers (AMMs) to allow investors to trade digital assets in an automatic, permissionless way. Simply put, these pools remove the third-party intermediary and lengthy order book model that is typical in traditional buyer and seller markets.
Liquidity pools were born out of necessity, but they have evolved into an innovative way of providing decentralized liquidity. In fact, it was instrumental in the growth of the DeFi sector.
Removing technical barriers to DeFi
Some experts claim that DeFi is poised to replace the old financial system. But the technical know-how barrier is a potential roadblock for widespread adoption. Amateur traders would easily get lost in the nitty-gritty of the DeFi ecosystem.
AlgoBlocks automates the workflow of adding liquidity to liquidity pools so you can earn liquidity tokens without doing the extra legwork. Not only does this automation save you time, but it also helps reduce human error and the danger of washout.
Here’s how this automation feature works:
Instead of having both pairs to add liquidity to a liquidity pool, users only need just one relevant asset to the pool and the tool will swap the other half for you on your behalf. By doing so, you’ll have both pairs to add liquidity.
The feature is fully transparent as it shows you how much, how fast, and how the transaction works.
The tool displays all the costs and controls that are important for you to add liquidity. After you click “Invest,” you will have a chance to review all the details of your transaction before you make a trade.
A transaction confirmation window will appear to summarize your transaction before you make the trade.
Reducing risk in DeFi trading
Understanding how liquidity pools work is a vital part of successful DeFi trading. More than being pools of tokens stored in a smart contract, they help mitigate some of the problems caused by the illiquidity of the market. In other words, they reduce risk and help investors enjoy value stability while earning a share of the trading fees to augment their original investment.
The larger and more established the liquidity pool is, the more stable they are for novice traders. On the contrary, when the pool is smaller, it’s more vulnerable to market swings, which could cause the value of your tokens to drop.
Slippage is also a top concern among DeFi investors that liquidity pools help address. If the liquidity is low, it would incur slippage, which means the executed trading price is greater than the original market order price.
Liquidity pools provide the much-needed asset liquidity for traders to swap between cryptocurrencies. But this mechanism only works if you choose the proper pool and you do it right. This way, you can ensure that you’re putting your funds into the highest yielding asset pairs and that you’re moving them to DeFi investments that provide the most liquidity.
With AlgoBlocks’ simplified workflow for adding liquidity to liquidity pools, you can quickly and easily supply your chosen pools with assets for smarter trading on DEXs. Efficiency is the name of the game when it comes to DeFi trading. Enjoy liquidity, speed, and convenience while maximizing your earnings by using AlgoBlocks’ liquidity adding tool.