What is Liquidity Pool ?
Liquidy pool in Defi meaning, is , a pool that contain liquidity for your assets market.
This is second concept to run a market of a coin.
Since there are few points where we can agree that Liquidity pool are better option for a coin market.
But there are few point where we can’t accept this liquidity pool system from the point view of security of funds .
Invention of Liquidity Pool
Concept of liquidity pool was introduced by Defi concept project.
Where they made a system that will allow people to buy-sell Cryptocurrency without any centralised exchange .
In simple word we can say , it is a non transparent buy sell coin platform of Cryptocurrency .
How liquidity pool works?
Usually to buy or sell our coin we need to go at a trusted exchange of Cryptocurrency where people already placed their buy sell order of the coins .
But here the concept of buy and sell of the coin is totally different from traditional exchange system .
Here we will get a pool where we give our coin and will get another desirable coin in equivalent value , known as swapping of the coin .
Who is owner of Liquidity Pool ?
Nobody , Yes no one is owner of the liquidty pool .The whole pool is owned by multiple people.
Any person who want to be owner , should invest his fund jn the liquidity pool.
This is a type of governance, higher the amount of fund your will put in the liquidity pool higher will be your governance.
For example , if in a pool there is investment of $10, $30$, $60 by three person.
Then governance of three people will be 10%, 30% & 60% respectively.
Advantage of Liquidity Pool
Pump & Dump Scam
In the present time many types of pump and dump type groups available that attack at a coin and can increase market price and also can crash of that coin.
So in this scenario a beginners, who don’t know about pump and dump scam, gets into trap of scam.
So the liquidity pool gives facility for a newbie in cryptocurrency market to make buy and sell a coin with ease and decreases chances of pump and dump scam trap.
We can invest our money in liquidity pool and can make earning.
Usually we need to invest our money in liquidity pool. We can invest our money by deposit the equivalent amount value of a pair of coin. This type of investment is known as Yield Farming .
We have a separate article about yield farming you can check the article by click here.
Borrow & Lending
We can Lend and borrow both the things in The liquidity pool.
At one side people do investment in liquidity pool ( maker ) to make earnings.
But another side we can borrow fund, but that borrow amount will be 75% of the whole portfolio of the liquidity fund that we invested there.
Understand this thing by example, if we have investment in liquidity pool which have value around $100, then we can borrow $75 from the pool.
But keep in mind that if the value of your portfolio will get fluctuate due market up & downs then they will lock your all funds in the pool, after that either you need to wait or deposit more fund to maintain your protocol value ( according to their terms and conditions ) .
Disadvantage of Liquidity Pool
There are many disadvantages of the liquidity pool.
Especially for those who are very old in this field.
1. Transparency in market price
This is main problem in the Defi Based liquidity pool because the main reason is we can’t believe at any thing blindly.
In liquidity pool price of a coin is not shown and that makes totally a worst thing for us .
They give just option to swap your coin to another coin but at what rate? They will not tell.
2. Wall Order of coin market
For research and analysis to predict the market of the coin for next two to three days/week/month we need to see the graph of coin and also we need to check the wall of order of buy and sell .
As all of us knows very well that if a wall of coin is strong then there are very less chance of dump in the coin price and vice versa.
But here in liquidity pool system we have option to swap our coin into another where nothing is shown.
So this is a big limitation for us.
3. Reverse & Stuck of transactions
Usually it works fine but still it is in the development phase, so that whole system is not working 100% accurately.
Sometimes transactions get reversed and sometimes stuck for few days.
So this is a small headache for us in this starting phase.
4. Security Issue
In centralise exchange, owner is responsible for any security issue.
But here Defi’s liquidity pool is not centralized, so if something happen wrong in future then who will be responsible for the loss.
Here security is a big factor that is wondering in our mind because this is in early stages of development .