A buzzword frequently seen on both old and new exchanges alike, liquidity is key to the survival of trading platforms. Defined as the ease at which an asset can be converted into cash, the greater the liquidity an exchange provides, the more traders are willing to engage with the platform. How many ‘liquidity’ terms do you know?
We delve into all things liquid in the digital assets world today with this week’s Crypto Terminology A to Z.
Unlike traditional financial markets, the crypto market does not rest or stop; the numerous investment products Rranging from derivatives to spot on both decentralized and centralized exchanges can make it challenging for traders to review the perpetual, massive influx of data. This is where liquidity aggregators come into play. Traders can view a stream of collated price data from multiple sources to aid in their trades with the help of aggregation algorithms.
This is the foundation behind the more commonly known Liquid Proof of Stake (LPoS), where individuals can participate in major decisions with a vote, or delegate others to vote on their behalf. Often utilized in decentralized finance (DeFi) protocols and governance systems, users earn votes proportional to the amount of funds they stake on a particular network. Their votes can significantly alter the future plans of the project they are invested in.
Talk of liquidity pools was all the rage in the summer of 2020 when interest in DeFi surged. Market participants, who are called Liquidity Providers, would place tokens in a pool to contribute to a micro trading market on a decentralized platform. They profit from trading fees in proportion to the total percentage of liquidity they have provided in a single pool. The ease at which any individual could become a liquidity provider encouraged droves of the crypto population to contribute their crypto assets to these pools and popularized the idea of straightforward earnings on decentralized exchanges.