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Author: Admin | 2025-04-28
At the same time, PancakeSwap uses BEP-20 tokens on the BNB Chain.Read more: Decentralized Liquidity Is the Backbone of DeFiWhat is the purpose of a liquidity pool?In a trade, traders or investors can encounter a difference between the expected price and the executed price. That is common in both traditional and crypto markets. The liquidity pool aims to eliminate the issues of illiquid markets by giving incentives to its users and providing liquidity for a share of trading fees.Trades with liquidity pool programs like Uniswap don't require matching the expected price and the executed price. AMMs, which are programmed to facilitate trades efficiently by eliminating the gap between the buyers and sellers of crypto tokens, make trades on DEX markets easy and reliable.What are the incentives for liquidity pool providers/depositors?There are multiple ways for a liquidity provider to earn rewards for providing liquidity with LP tokens, including yield farming.Read More: What Is Yield Farming? The Rocket Fuel of DeFi, ExplainedThis allows a liquidity provider to collect high returns for a slightly higher risk by distributing their funds to trading pairs and incentivizing pools with the highest trading fee and LP token payouts across other platforms.How does a liquidity pool work?As mentioned above, a typical liquidity pool motivates and rewards its users for staking their digital assets in a pool. Rewards can come in the form of crypto rewards or a fraction of trading fees from exchanges where they pool their assets in.Here is an example of how that works, with a trader investing $20,000 in a BTC-USDT liquidity pool using SushiSwap.The steps would be as follows:Go to SushiSwap.Find the BTC-USDT liquidity pool.Deposit a 50/50 split of BTC and USDT to the BTC-USDT liquidity pool. In this case, you would deposit $10,000 worth of USDT and $10,000 worth of BTC.Receive BTC-USDT liquidity provider tokens.Deposit LPTs to the BTC-USDT staking pool.Get the SUSHI token as a reward after the lockup period that you agreed to hold within a vault. It can be a fixed time like one week or three months.The BTC-USDT pair that was originally deposited would be earning a portion of the fees collected from exchanges on that liquidity pool. In addition, you would be earning SUSHI tokens in exchange for staking your LPTs.Popular liquidity pool providersMany decentralized platforms leverage automated market makers to use liquid pools for permitting digital assets to be traded in an automated and permissionless way.
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