Liquidity pools are undoubtedly one of the most important innovations in the crypto market
Thanks for bringing up this important topic.
Understanding what liquidity pools are, how do they work and why do we need them in the first place is a must for anyone who want to be involved in DeFi. Wouldn't you agree?
(actually, I'm not even sure if platforms like pancakeswap, uniswap or robiniaswap should be considered DeFi. Simply because those seem to be centralized projects. I wonder why don't we call it CeFi instead? Any idea?)
Back to main topic:
Coin exchange is made with a liquidity pool instead of a second person or market maker.
I find it quite difficult to understand. So we do not need to "match" price placed by sellers and buyers. So what determine price of the token?
Solid read. Upovted already :)
ps.
could you perhaps check out my latest post (MINING RobiniaSwap (RBS) Tokens? Could you be making one of these mistakes?) and help me bring more traffic to it by resteeming this publication?
Cheers, Piotr
Hi Piotr,
Thank you for your comments.
Centralized exchanges work on centralized hosts. Decentralized exchanges like Uniswap and Pancakeswap are decentralized applications(dapps) working on Ethereum and Binance Smart Chain blockchains which are decentralized. The ideal dapps are managed by DAOs(decentralized autonomous organizations) consisting of token holders.
The price is determined by supply and demand. People buy from the pool and sell to the pool. The pool automatically adjusts the price considering supply and demand.
Best Regards,
hi @muratkbesiroglu
I've small question related to liquidity pools and impermanent loss.
I'm trying to wrap my head around it and based on my understanding:
in that case I would need 5000 RBS tokens and 1000 usd worth od BUSD. Is that correct?
Now, what would happen if price of RBS would:
a) scenario one: RBS would drop down to 0.1$ (50% drop)
b) scenario two: RBS would go up to 0.4% (100% increase)
I presume that the moment I exit liquidity pool, then I would end up still with 1000usd worth of BUSD, but amount of RBS tokens would be different.
Now, my question is: how many RBS tokens would I have at the end of the day (depending on the scenario).
Enjoy your weekend buddy,
Yours, Piotr
Hi Piotr,
That is correct.
You would have 1500 USD in total if you had the two cryptos separately. But you will have 707 dollars worth of BUSD(707 BUSD) and 707 dollars worth of RBS(7070 RBS) in the liquidity pool. (%5,72 extra loss because of impermanent loss)
You would have 3000 USD if you had the two cryptos in separate. But you will have 2828 USD worth of tokens in the liquidity pool. (3535,5 RBS and 1414,4 BUSD)
Best Regards,
thanks for that feedback @muratkbesiroglu