DEXes and Liquidity

12 Jun 2022

Have you ever tried swapping a token on a DEX and you got the 'insufficient liquidity' message from the swap button? Well, you must note that without liquidity, it is impossible to trade that particular token with no liquidity.

Or, if liquidity in a token pair is low, you may experience a high slippage when trying to swap that particular token.

 When a token is launched, the initial liquidity is added by the project's owners. Then, other users are allowed to provide liquidity to the token pair. 

Users who provide liquidity are usually rewarded with some incentives to motivate and encourage them to provide liquidity to the token pair, the first of which is earning a certain percentage of fee from every trade a trader makes to buy or sell the token in which the provided liquidity too.

To further motivate people to add liquidity on DEXes, most projects introduce a farming event whereby liquidity providers stake their LP tokens to earn a certain token, this has been a motivating factor in the cry[to space today to provide liquidity to certain token pairs.

Also, it is necessary to know that providing liquidity has its pros and cons, it cons being that liquidity providers are being exposed to impermanent losses.

Write & Read to Earn with BULB

Learn More

Enjoy this blog? Subscribe to Sami♧


No comments yet.
Most relevant comments are displayed, so some may have been filtered out.