The decentralized financial economy runs on something that is known as “liquidity”, which refers to the funds provided by protocol users to tick their engines. These liquidity pools are the lifeline of Defi applications, allowing users of tokens to exchange, funds and borrow and borrow more.
At the time of writing, there is currently more than $ 100 billion in value locked in hundreds of Defi -Liquidity pools. The vast majority of these Polish is what the token transactions feed on decentralized exchange platforms. They are made when users lock up two types of crypto in a smart contract, which requires capital that others buy and sell these assets.
Why do Dexs need liquidity?
If a token pair on a decentralized exchange has a low liquidity, it causes a problem that is known as “slipping”, that is where the trader will see a noticeable difference between the expected token price before they make a trade and the actual token price after they have performed it.
These slipping occurs when there is not enough liquidity in the pool to process the user’s order at the same time. The lack of liquidity means that the order will be processed in different phases and in each phase the balance of the tokens in the pool changes, which changes their price. But if a swimming pool has a lot of liquidity, Slipping is not noticeable. Instead, users will be able to buy and sell those tokens quickly without a significant price impact. These Polish are therefore essential for the smooth operations of DEX platforms, and that explains why they offer strong incentives for people to collapse liquidity.
Offering liquidity can be a lucrative company for investors, because most DEX platforms offer strong stimuli to deposits. In essence, everyone who plunges liquidity into a pool gets a proportional part of the rewards arising from the fees that are applied to every trade on the platform. The actual costs and offered incentives vary from platform to platform.
In addition, investors usually receive “liquidity provider tokens” or LP -Tokens, those tokens that represent their share in the liquidity pool. These can be controlled to other Defi protocols to earn extra yield.
How to offer liquidity?
To get started, you must identify the platform on which you want to deposit money. Some of the most popular Dex’s are Uniswap, Sushiswap, Curve, Balancer and Pancakeswap. Your choice really depends on what is best for you, taking into account your familiarity with the platform, the ease of use, the token pairs it offers, the advertised yield, and so on.
For the unknown, there are various websites, including Coinmarketcap and Polish, which offer tools for comparing the rewards that are offered by various liquidity pools on DEX platforms.
After you have identified a platform, you must connect your crypto wallet to the DEX. Popular portfolios such as Metamask, Trust Wallet and Exodus are recommended because they are compatible with the most top DEX platforms. You then simply work on the list of liquidity pools that DEX on and check the rewards offered, while taking into account the risks associated with each token.
As a rule, the stimuli are often much higher with more obscure tokens, but deposit in these Polish also entails a higher risk.
In most cases you have to buy an equal amount of the two tokens, so that you can deposit funds on both sides of the swimming pool to maintain the balance. For example, if you want to place $ 500 in the ETH/USDT -Liquidity pool of Sushiswap, you should buy $ 250 from ETH and $ 250 from USDT.
Once you have identified the pool that you want to take with you and have the necessary funds, the next step is to continue and make the down payment. Depending on the DEX, you may need to set a proxy contract or sign a transaction message before you can do this. This is usually a one -off promotion, and all you have to do is click on “confirm” when you are asked for this by your wallet. This step can yield gas costs.
Make sure you are the triple portfolio address, where you send the money to ensure that it is a legitimate wallet of Dex. Because most crypto transactions are irreversible, you cannot afford to make a mistake. After the transaction has been confirmed, you will receive the LP tokens for that specific pole.
Most DEXs automatically deposit all transaction costs charged to traders in their respective liquidity pools, so liquidity providers only earn their rewards as soon as they have exchanged their original down payment.
How to maximize the yield of the liquidity pool?
The rise of liquidity pools has led to the rise of “yield issue”, in which users are constantly relocating their funds across various pools, which chase the highest possible yields. However, it has become increasingly difficult to maximize strategies for the agriculture of yield because of the ever-increasing complexity of the Defi landscape.
Protocols constantly adjust their stimuli in real time, and there are literally hundreds of DEXs and thousands of liquidity pools to choose from. It is therefore simply not possible that people stay informed of everything and to ensure that their capital is always in the most profitable Polish. We miss the cognitive ability to do this, and we must also sleep!
Enter AI agents who offer a smart solution to this problem. AI has the advantage that it never has to go to sleep, and it can constantly follow hundreds of protocols over dozens of block chains to identify the most profitable liquidity that offer opportunities.
The AI agent Arma of GIZA Protocol is, for example, an autonomous revenue optimization agent who is designed to help investors maximize their profit in offering liquidity to stablecoin pools about networks such as base and modus network.
It works by monitoring Defi protocols such as Aave, Morpho, Moonwell and Compound, so that the fluctuating stimuli constantly monitor that these platforms offer. The goal is to ensure that the funds of its users always earn the maximum possible profit. If the user’s funds are currently deposited in the USDC/ETH pool on Aave, and it suddenly sees that compound offers a better rate in its USDC/ARB pool, it can immediately withdraw those funds from the first pool and deposit them into the second to ensure that they take advantage of that higher rate.
Even better, Arma not only looks at the rewards offered, but it also incurs the costs for the costs of moving the user funds. If the extra gas costs mean that the user will no longer make a profit, the Swap. Giza says that Arma can be an incredibly effective tool, with one of his studies that showed that it was able to generate an increase of 83% in the yield versus maintaining a static position in just one liquidity pool. No wonder, that Arma has already managed more than $ 1.16 million in user funds.
Are there any risks?
Providing liquidity in Defi can be extremely profitable, but users must be wary that it is not always the case. Although you are guaranteed to earn part of the reimbursements, anyone can carry out a transaction using that pool, other factors can influence your profitability.
The greatest risk associated with liquidity pools is a phenomenon that is known as “perishable loss”, which refers to when the ratio of tokens in a pool becomes unbalanced due to substantial price changes in the underlying assets. If this happens, the value of the user’s funds can crash considerably. The threat of perishable loss should not be ignored, with one investigation of 2021 by Bancor that more than half of all liquidity providers on Uniswap lost money in dollars, even if they collect trading costs.
Most experts say that bull markets offer the best chance of liquidity providers, because trading activity tends to rise considerably and the price of the underlying assets can also rise. This helps to prevent the effects of perishable loss. But in bear markets the opposite is true.
The Lifestay of Defi
Because liquidity pools are still a relatively new concept, they have put on almost as much skepticism as they have speculation. It is fair to say that investors can generate a considerable passive income by offering liquidity to Defi exchanges, but this can also be very risky. In addition to the perishable loss, there is the risk of rug and smart contract errors, so that investors lose all their funds.
Nevertheless, liquidity is the lifeline of Defi, absolutely crucial for protocols to work, and as long as Defi exists, incentives will always be offered for people who want to offer it. In addition, Defi protocols are constantly innovating and they come more creative mechanisms to reduce the risks of perishable loss.
