Liquidity Pools and Liquidity Providers | Yield Farming Part 2
What are liquidity pools? What are liquidity providers? Find out how liquidity pools are used in DeFi to create yield farming opportunities on the blockchain and how to become a yield farmer.
This is a 3 part series on yield farming. You can watch part 1 here vimeopro.com/beessocial/yield-farming/video/524025857
The first thing you need to understand about liquidity pools and liquidity providers are the players in this game. You are a liquidity pool provider in this game, and you are going to place liquidity into a liquidity pool. Thus you're the liquidity pool provider. To make this happen you are going to need to identify where you can find a liquidity pool.
What liquidity pools are designed for?
Look at a liquidity pool like this. There are cryptocurrencies that are widely traded, that many people just went out and purchased and they keep in their Coinbase or Gemini account and they just keep it there perpetually. And it's really not doing anything. It's not really working for them. There are people that need liquidity in order to make larger, more sophisticated trades like, arbitrage or loans or something else like that.
And where do they need to get those extra funds? The place where people get them is something called a liquidity pool. So if a more sophisticated investor needs to borrow funds,and it's all secure because it's all based upon smart contracts that if the borrower wherever isn't good for it, either the smart contract with self-destruct before it puts you at risk, or if they had collateral and it looked like their position that they were loaning against drop below that collateral, the smart contract would automatically liquidate them and you'd be made whole.
This liquidity enables sophisticated participants in this game to use your liquidity, to make trades and do things on their end. But whenever they touch those funds and the liquidity pool, they pay a trading fee on unit swap. It's equal to 0.3% is paid to everyone in the liquidity pool. It's paid and it's allocated to everyone based upon your percentage of the pool.
So you have 10% of the pool. You're going to get 10% of that. As a liquidity pool provider, you have the ability to contribute capital into a liquidity pool. Other sophisticated operators are going to use those funds in the liquidity pool to execute their trades. As soon as they touch those funds, they are going to pay you for that opportunity.
The trading fees will go to you as a member of that liquidity pool as a provider. That's how liquidity pools work. You have these automated market makers who are completely decentralized. This means they are not a company. They are simply a set of programs that are running that automated market maker is going to enable you to participate in a liquidity pool as a liquidity pool provider.
And when people use it, you get paid. And then that happens on a regular basis. So not only would you enjoy the appreciation of this widely traded asset, let's say you, your liquidity pool was composed of rat PE and Ethereum as those two grow or changed over time, you'd be able to, uh, participate in the appreciation of that particular asset.
Not only would you be able to participate in that appreciation? You're also going to be on top of that. You're going to be able to stack the trading fees and that's the beauty of being a liquidity pool provider. That's the benefit of participating in liquidity pools. In the next video, we're going to talk about liquidity pools and how they can help people contribute to the growth and yield farming.
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