Liquidity Pools: Slashing Impermanent Loss With Concentrated Liquidity
Liquidity pools are the backbone of decentralized exchanges (DEXs) and a critical component of the decentralized finance (DeFi) ecosystem. They enable users to trade cryptocurrencies without relying on traditional market makers, offering opportunities for both traders and liquidity providers. This article provides a comprehensive overview of liquidity pools, exploring their mechanics, benefits, risks, and practical applications.
What is a Liquidity Pool?
Defining Liquidity Pools
A liquidity pool is a collection of tokens locked in a smart contract that facilitates trading and other decentralized applications (dApps). Instead of traditional order books that match buyers and sellers, liquidity pools use an automated market maker (AMM) mechanism. This means that trades are executed against th...