What is Liquidity & Why is it Important?

Learn with Robi!

How are y’all doing today? Robi is here with an informative short lesson about Liquidity. You might already know a great deal, but I hope you will be able to discover something new for yourself today!

What is Liquidity?

In crypto, Liquidity means how easy and fast it is to swap one token for another and if it can be completed without causing significant impacts on the market price.

The more liquidity the project has, the easier it is to implement new products. Liquidity helps DApps invest and release new features for users to profit, expand the project’s ecosystem, and strive ahead to new developments.

You may wonder, why is Biswap so attractive for Liquidity Providers? Well, just look at the benefits:

  • Get a 50% Fee Reward

  • Earn robust BSW tokens

  • Enjoy high APRs on Farms

Join in to take advantage of this profitable feature on Biswap! A few simple steps and you’re set:

1️⃣ Provide Liquidity 2️⃣ Enable Farms 3️⃣ Earn via TOP APYs

How do Liquidity Pools Work?

Liquidity Providers, Liquidity Tokens, and Automated Market Makers are crucial to understanding how liquidity pools work.

  • A liquidity pool is a smart contract with locked tokens to provide liquidity.

  • Liquidity providers provide liquidity to the exchanges with the most attractive offers. For example, on Biswap, users earn 50% fee rewards and enjoy the lowest commission of 0.2% on the BNB Chain.

  • AMM uses algorithms to price assets through liquidity pools to enable trading. Different protocols may utilize slightly different algorithms for liquidity pools.

Are you still here? Good, let’s keep going!

Why is Liquidity Important?

Liquidity in some crypto assets is more significant than in others. Why? It is a side effect of increased trading volume and market efficiency. Some markets might have a daily trading volume of a few thousand dollars, while others have millions.

With greater liquidity, what opportunities do users and projects (e.g. Biswap) have? Plenty! Some of them I’ve already mentioned above, and there are a few new ones:

  • Profitable opportunities for users

  • Extra crypto rewards

  • New features and products

  • Global collaborations with potent projects

  • Overall progress in the DeFi ecosystem

As you can see, it’s a better idea to trade assets on exchanges with greater liquidity. Any experienced trader will warn you about the risks of entering a market with minimal liquidity, especially with significant investments. At the same time, it’s important to note that any trade is subject to slippage, regardless of its size.

What is Slippage?

Slippage is a difference between the expected transaction price and the price at which the transaction is executed. Slippage can happen anytime, but it’s most common when market orders are carried out during moments of higher volatility.

Explore 2 kinds of slippage with me:

πŸ‘ Positive πŸ‘Ž Negative

Positive slippage occurs when the actual price for a buy order is lower than the expected price, offering traders a better rate than they requested.

Negative slippage occurs when the actual executed price for a buy order is greater than the expected price, offering traders a less beneficial rate than they requested.

The slippage issues will vary depending on the AMM design, but it’s something to keep in mind. It’s essential to be extra cautious when exchanging pairs with insufficient liquidity.

What is Volatility?

Volatility is the measure of a price change of an asset over a certain period. It can be steady and rapid. There are two sides when it comes to volatile assets. On the one handβ€Šβ€”β€Šmore volatility can lead to higher returns. On the other hand β€Šβ€” β€Šmore volatility can lead to more significant losses. The more volatile the asset is, the greater the risks.

Be sure to do your own research before making any considerable investments!

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