Thread by @kendrickNoble7

A Thread On Liquidity and Liquidity Pools 👇

So What's Liquidity?

Liquidity Can Be Referred To As The Soul Of The Financial Market. E.g Stocks, Forex, or Cryptocurrency Market (CEFi and DEFi)

Liquidity gives the ease to convert an asset (crypto, stock) to cash without a sharp decline/dump in price.

It gives the power to convert crypto to cash Be it through buying or selling.

Some Projects May Look Extremely Cheap But Liquidity Can Be A Criteria To Determine The Health Status Of A Project/Asset If It Would Stand The Test Of Time Or Easily Fade Off/Fail.

When There Is Insufficiency Liquidity in a project, it can fail, cause trust issues amongst the Project's community and Rugpull.

Liquidity Also Varies Across Different Exchanges, Financial Markets,Crypto Projects and Even The Banks Need Liquidity For Their Day-to-Day Activities.

Sometimes Even The Banks, Your Workplace Fail To Meet Up With Their Day-to-Day Financial Commitments and Transactions Due to Insufficient Liquidity At Hand.

You could go to the bank , despite having cash loaded in your account and end up unable unable make withdrawals or

pull out large amount of funds. The Banks On The Other Hand In A Longrun could fold up if they meet up with Govt Yearly Targets If There Are Insufficient Liquidity To Continue Running Their Activities,Hence you come across Mergers in The Banking Sectors and sales of various banks

The Banks On The Other Hand Might Have Invested Your Hard Earned Money or Loaned It To Investor Minded Persons For A Return and Hence There Is An Insufficiency Liquidity To Allow You Make Financial Transactions At That Time.

So In Essence, Liquidity Is Almost As Vital To Everything We Have Accepted As A Means Of Value/Exchange.

But Then Let's Face The Cryptocurrency Sector 🏂

I Previously Stated That Liquidity Could Be Added Or Removed.....

When Liquidity Is Removed, It's Called A "Rugpull"

When Liquidity is Provided, It Is Called Liquidity Provision.

The Adjective "Liquidity" Obviously is Carved From The Word "Liquid" , and one of the most important characteristics of a liquid is To Flow and Not Being Stagnant.

Stagnancy Deters Growth, Hence Insufficient Liquidity Also Deters The Growth Of An Asset Or Cryptocurrency Project

What Is A Rugpull?
A Rugpull Occurs When There Is Little Or Insufficient Liquidity In A Project Leading To A Very Sharp and Drastic Dump In Price.
It Occurs When A Huge Part Or Almost All Of The Liquidity Is Removed From The Project.

In lame man's idea, the Project is one that can take but cannot give or be removed from.
In other words, when Liquidity Is Removed, you can't sell your token to access your capital, profits or even losses.

What Causes A Rugpull?

💠Unlocked Liquidity....When Liquidity isn't locked and renounced it can easily be Manipulated and the funds (Initial Liquidity + Investors funds) stolen as they can access it easily.

💠Removal Of Liquidity (By LPs and Devs) which will cause Massive Dump.

💠Nature Of The Developed Project...By This I mean how was it designed. In some Projects mostly fairlaunches, some developers design it to allow just only one wallet sell thereby stealing all invested funds.

💠Hack/Cyber Attacks On The Project

💠Tokenomics with main respect to the Token Distribution Amongst Token Holders.

Now In The World Of DEFi, Liquidity is Provided by people we refer to as LPs....
LPs are Liquidity Providers.

These Liquidity Providers Are Also Token Holders and They Provide Liquidity To What We Refer To As A Liquidity Pool Locked In Smart Contract (Digital Contracts programmed on blockchain technology which are immutable and not easily tampered), Which Is Used

Which Is Used By Decentralized Exchanges (DEXes) /DEFi Protocol To Carry Out Defi Trades/Swaps, Staking, Farming etc.

Generally, For A trade to take place be it a normal market, Crypto, Stocks or Forex market, you need a willing buyer and a willing seller and then agreeing to some particular terms . E.g if yam is to be sold in a marketplace, you must first find someone willing to sell the yam.

You will both agree on the price for the yam and the quantity and then make a deal.

This method is also applied in the Stock Exchanges and Centralized Exchanges. They use an order book model to pair buyer's bid price and seller's asking price on an Automated Market Maker

helps sustain the liquidity of the Exchange by automatically allowing trades at the various bid and ask (sell) prices.

Now This Means That For Every Buy Order There Must Be A Corresponding Sell Order.

DEXes however use Liquidity Pools In which the system allows you to buy and sell even if nobody is selling to you or buying from you.

Liquidity Pools ?
Now, Imagine A Basket Where 2 or More items (assets) are kept for the purpose of exchange/trading. E.g Imagine we have a basket of eggs and 1 dollar notes.
So You Have One Option ad To Act As One Of Either A Buyer Or A Seller With Equal Actions To Be Executed.

So I Can Walk Up To A Basket , Drop An Egg and Carry a $1 note. Another Person can come to the Basket, drop the $1 note and then carry an egg. However the issue of trust may come up, as one party could cheat the other and carry some extra item.

Now In The World Of DEFi, Liquidity Pools Are Governed Via Executions Of Smart Contracts, which is immutable and can almost not be tampered with once it is programmed.

Hence, The Basket-Like Exchange Decsribed Is One In Which Nobody Can Cheat.

This is because you will only get an egg of same value as the value of dollar notes you drop.

When A New Coin Is Created A Liquidity Pool Must Be Created For You and I To Be Able To Buy and Sell Our Tokens.
It's Usually In A 50-50 Ratio or %.

For instance, If I Launch A Coin Named $Iron on the Fantom Blockchain (Ftm), I will have to create a Liquidity pool of "Iron-ftm"
If I Put 1000 $Iron in the pool and I drop 10 ftm, it means that 1000 $Iron is equal to 10ftm.

Assuming the price of Ftm is $2 per 1 token, it means 1000 $Iron = $20 and 1 $Iron = $0.02 per 1 token and that's how the coin derives its price.

Thus A Liquidity Pool Is A Collective Pool Of Funds Which Is Used to Provide Liquidity For A Given Market and Generates Rewards In Return.
#❤ and 💡 Fam....Stay Dynamic and Keep Learning

#DeFi #liquidity #CryptoNews #Binance #LearnDEFi #AdoptDEFi #BreatheDEFi #learn