Maturing the Backbone to Decentralized FinanceIf this post is pay-walled, click here.
One of the most interesting recent developments in cryptocurrency is the emergence of decentralized liquidity pools.
Inbound/outbound liquidity is essential for the creation and growth of financial markets; price discovery, and the ability to move in and out of trade positions, whether they’re from a big institutional firm, or a small-time trader, remains a key piece of crypto’s maturity.
Decentralized payments are just one piece of the puzzle, as you’ll also need the assistance of decentralized liquidity to build and extend additional functional financial layers on-top of your blockchain-related protocol/application. Liquidity is king, and it can make or break your protocol if you cannot rally sufficient liquidity to aid in your project’s growth and enable the use cases you sought out to provide your end-users.
With the proliferation of decentralized lending, borrowing, and more, the current decentralized landscape starts to form the basic essentials necessary for the financial instruments we’ve grown familiar with in traditional legacy markets. To better understand where we’re at, let’s first go deeper into what solutions the industry has concocted thus far.Liquidity Pools
To begin, liquidity pools could help address a key problem faced by new token-based projects: the need to arduously bootstrap a liquidity-providing network before the project has real utility. Liquidity pools can mitigate this by providing a unique, less-speculative reason for people to hold tokens that do not have a large user base yet (i.e., to provide liquidity for a fee). Moreover, the existence of the pools provides added reassurance to large investors in young projects who do not want to get stuck trying to unload their tokens in an illiquid market. The pools thus function somewhat like insurance for token holders (we’ll cover this idea more below).