Liquidity Pools for Non-Custodial Assets (Cryptocurrencies)

Liquidity Pools

Liquidity pools are a fundamental component of the decentralized finance (DeFi) ecosystem, particularly within decentralized exchanges (DEXs). These pools allow users to deposit assets into smart contracts, creating a reserve that facilitates seamless asset trading. By eliminating reliance on traditional order books, liquidity pools enhance market efficiency, improve price stability, and enable rapid transactions.

Automated market makers (AMMs)

Automated Market Makers (AMMs) replace traditional buyer-seller market structures by leveraging liquidity pools. Instead of matching orders, AMMs use algorithm-driven pricing mechanisms that adjust asset values based on supply and demand. Users contribute liquidity by depositing digital assets into pools, with prices determined by a mathematical formula that maintains market equilibrium.

The core pricing model follows a constant balance equation, ensuring that as demand for one asset rises, its price increases relative to the other, maintaining liquidity and minimizing volatility. This system empowers permissionless trading, fosters decentralized liquidity provision, and enhances overall market accessibility.

Liquidity Pools for Non-Custodial Assets