The Purpose of a Liquidity Pool
Investors or traders may experience a discrepancy between the executed price and the expected price in a trade. Both traditional and cryptocurrency markets have that. By offering incentives to its users and offering liquidity in exchange for a cut of trading fees, the liquidity pool seeks to solve the problems associated with illiquid markets.
It is not necessary for trades performed through liquidity pool software like Uniswap to match the expected price and the executed price. AMMs are designed to efficiently enable trades by bridging the gap between buyers and sellers of crypto tokens, making trades on DEX exchanges simple and dependable.
What are the rewards for depositors and suppliers of the liquidity pool?
In addition to yield farming, there are other ways for a liquidity provider to profit from supplying liquidity with LP tokens.
By allocating their money to trading pairs and rewarding pools with the highest trading fees and LP token payouts across different platforms, this enables a liquidity provider to earn large returns for a somewhat higher risk.
