I’m back for another tutorial…

This one explaining ‘Liquidity Pools’.

You’re gonna want to strap in because Liquidity Pools can get complicated.

First off, what is Liquidity?

Liquidity: An available amount of money

Secondly, what is a Pool?

In our DeFi niche, a pool is simply a collection of something in a smart contract.

Put these together, and you have “An available amount of money in a smart contract”.

Liquidity Pools are pools of money of at least 2 tokens or coins.

What are they used for?

>>> TRADING<<<

That’s right, you put two tokens in a pool and they are used for trading.

Traders come along, give the pool token A, and it gives them token B.

Someone else comes along, gives them token B, and the pool gives them token A in return.

Throughout time, these pools use a simple formula to balance the tokens out.

As someone comes along and buys more and more of token A… the pool simply charges more for it!

By doing this, token A starts becoming more expensive, but token B also gets cheaper.

This means we create arbitrage opportunities for traders to buy a coin on an exchange and sell it to the pool to make the prices stable again!

I could explain more about how liquidity pools work, but I’d rather show you how to make money with them.

In short, if you provide those initial 2 assets to the pool, you earn money.

How?

Well, traders pay a very small fee to swap their tokens. Over time, these fees add up and you can earn from 20% to 1000% APY by providing your pools.

There’s a catch though. If you’re new to this idea, there’s a risk called “impermanent loss” but it’s very complicated for beginners to understand and that’ll be another email some day. You can watch videos on Youtube about it, but it took me a month to fully understand how it works. In short, you don’t need to fully understand it to make money by investing, but it is a risk to keep in mind.

– Theodore