Liquidity Pools for Non-Custodial Assets (Cryptocurrencies)

Liquidity Pools

Crypto liquidity pools play an essential role in the decentralized finance (DeFi) ecosystem — in particular when it comes to decentralized exchanges (DEXs). Liquidity pools are a mechanism by which users can pool their assets in a DEX’s smart contracts to provide asset liquidity for traders to swap between currencies. Liquidity pools provide much-needed liquidity, speed, and convenience to the DeFi ecosystem.

Automated market makers (AMMs)

AMMs are part of the decentralized finance (DeFi) ecosystem allowing digital assets to be traded in a permissionless and automatic way by using liquidity pools rather than a traditional market of buyers and sellers. AMM users supply liquidity pools with crypto tokens, whose prices are determined by a constant mathematical formula. This formula is similar to the classic exchange rate formula but looks otherwise:

Where k is presenting a constant balance of assets. This formula regulates token prices meaning that a decrease of available token A and an increase of available token B will increase the token A exchange price for token B. Such a structure means that token prices are regulated by the principle of supply and demand, when high demand on token A raises its price, considering that there are more exchanges of token B to token A.

Liquidity Pools for Non-Custodial Assets