Liquidity on Dex: Who Adds It and What’s the Point?
Liquidity lies at the heart of decentralised exchanges (DEXs), serving as a cornerstone for their functionality and success. Today, we revisit the fundamental concept of liquidity and delve into the intricate ecosystem of liquidity provision within DEXs.
As we explore the significance of liquidity and the key players involved in maintaining it, we will discuss who adds liquidity and the crucial role it plays in shaping the liquidity landscape of decentralised finance (DeFi).
What Is a Liquidity Pool and How Can It Be Used?
Liquidity pools form a crucial part of the decentralised finance (DeFi) ecosystem, enabling decentralised exchanges (DEXs) to function autonomously without relying on intermediaries. In contrast to centralised exchanges, which operate through third-party managed order book systems listing buyer “bid” orders and seller “ask” orders, DEXs employ a different mechanism. They often rely on community-funded liquidity pools to mitigate delays in order fulfilment caused by low liquidity or fluctuating market conditions.
These liquidity pools serve as reservoirs of assets available for trading within the DEX ecosystem. Trades within these pools are executed via smart contracts, eliminating the need for direct counterparties. This setup ensures immediate liquidity provision, offering users seamless trading experiences without the traditional delays or price discrepancies. Collectively, these decentralised finance (DeFi) platforms fall under the umbrella term of Automated Market Maker (AMM) protocols, revolutionising the way assets are exchanged in the digital realm.
How Do Liquidity Pools Work?
Every liquidity pool serves as a reservoir of funds secured within a smart contract by users, commonly referred to as “liquidity providers” or “LPs”. Typically, each liquidity pool hosts a specific pair of cryptocurrencies for trading on the DEX platform. For instance, users seeking to exchange CCD for USDT would locate a CCD/USDT liquidity pool. In return for depositing crypto assets, users who provide liquidity receive LP tokens representing their ownership stake in the pool. LP token holders are entitled to a proportionate share of transaction fees incurred by traders utilising the pool.
Some platforms offer LP token holders the opportunity to lock their tokens in other DeFi protocols to earn additional yields, a practice commonly known as “yield farming”. Most DEX platforms allow users who provide liquidity to withdraw their assets from the pool at any time. This process entails redeeming LP tokens for the deposited cryptoassets. Upon redemption, the liquidity pool smart contract burns the LP tokens, effectively eliminating them. Subsequently, the DEX transfers the assets back to the user’s crypto wallet.
How Do You Add Liquidity on Concordex?
Now, we’re going to delve into the process of adding liquidity on Concordex. It’s a straightforward procedure that allows you to contribute to the liquidity pool and potentially earn rewards.
Step 1 — Closing an Existing Liquidity Position: If you wish to alter or adjust an existing liquidity position on Concordex, you must first close it. Begin by ensuring that you are connected to the platform. Next, navigate to the ‘Liquidity’ tab and locate the position you intend to modify. Once you’ve identified the position, click on it to open it. Upon opening the liquidity position, you will be presented with the option to either close it or harvest rewards. To close the position, simply click on ‘Close Position’ located in the top right corner.
Step 2 — Initiating a New Liquidity Position: After closing the previous position, navigate back to the ‘Liquidity’ tab. Here, you can commence a new position by selecting the ‘Add Liquidity’ button located in the top right corner. Next, you’ll need to designate the token pair for the new position. These tokens can mirror those from the closed position, regardless of their sequence. Choose a Fee Level and input the desired amount of each token for the liquidity position.
Ensure you possess sufficient quantities of each token for the liquidity position. If needed, utilise the ‘Swap’ feature to acquire additional tokens and optimise your returns. Once all details are entered and fee levels configured, confirm the action by clicking the ‘Confirm Adding Liquidity’ button in the bottom right corner. Lastly, validate the transaction via your wallet. Once confirmed, your new position will become active on the ‘Liquidity’ page within a few minutes, pending completion of blockchain confirmations.
And there you have it, adding liquidity on Concordex is as simple as that. For additional instructions on how to add liquidity visit our comprehensive guide.
What Role Do Crypto Liquidity Pools Play in DeFi?
The fundamental purpose of a liquidity pool within the DeFi space is to furnish essential liquidity for decentralised exchanges (DEXs) or DeFi protocols. These pools facilitate efficient trading, swapping, and liquidity provision for a diverse range of cryptocurrency assets, ensuring ample funds for transactions and enabling these transactions to transpire independently of conventional order book systems. By ensuring an adequate supply of funds, liquidity pools contribute to the seamless functioning of the DeFi ecosystem, granting users the freedom to participate in decentralised trading activities with ease.
Conclusion
In conclusion, liquidity pools play a pivotal role in the decentralised exchange (DEX) ecosystem, providing the necessary liquidity for seamless trading and swapping of assets. Users contribute to these pools, ensuring there are ample funds available for transactions and enabling traders to engage in decentralised trading activities with ease. As the DeFi space continues to evolve, liquidity will remain a cornerstone, driving innovation and enabling broader adoption of decentralised financial services.
About Concordex
Concordex is a cutting-edge Decentralised Exchange (DEX) that operates on the Concordium Blockchain. Renowned for emphasising institutional-grade security, transparency, and user-centric design, Concordex offers various services, including staking, swapping, and perpetual trading. With a mission to bridge the divide between traditional finance and decentralised systems, it offers users an unparalleled trading environment.
