DeFi liquidity pool

A DeFi liquidity pool is a smart contract that locks tokens to make sure that those tokens are always available on a decentralised exchange. Users who give tokens to the smart contract are called "liquidity providers." 

DeFi liquidity pools came about as a new and automated way for decentralised exchanges to deal with the liquidity problem. They replace the traditional order book model used by centralised crypto exchanges, which was taken straight from the established financial markets.

 

In this model, the exchange acts as a market where buyers and sellers can meet and agree on prices for assets based on how much demand and supply there is for them. But this model only works if there are enough buyers and sellers to make the market liquid. So, the job of market makers is to make sure that there is always someone to meet the demand, which keeps prices fair by adding liquidity. 

For a decentralised exchange, the basic model has been shown to not work. Ethereum's high gas fees and slow block time make it unattractive to market makers.  Because of this, liquidity pools have become the go-to solution in decentralised finance because they offer decentralised trading platforms continuous, automated liquidity.

2.

How do DeFi liquidity pools work?

In its simplest form, a DeFi liquidity pool is just a smart contract that holds two tokens. These two tokens make up a trading pair. 

Let's use Ether (ETH) and USD Coin (USDC) as examples. To keep things simple, the price of ETH can be equal to 1,000 USDC. Liquidity providers put in the same amount of ETH and USDC. This means that if someone put in 1 ETH, they would also have to put in 1,000 USDC. 

Because of the liquidity in the pool, if someone wants to trade ETH for USDC, they can do so based on the funds that have been deposited instead of waiting for a trade partner to come along. 

The people who provide liquidity are rewarded for what they do. When they make a deposit, they get a new token called a "pool token" that represents their stake. In this case, USDCETH would be the pool token. 

All liquidity providers get their fair share of the trading fees paid by users who use the pool to swap tokens. This is done automatically based on the size of each liquidity provider's stake. So, if the trading fees for the USDC-ETH pool are 0.3% and a liquidity provider contributed 10% of the pool, they are entitled to 10% of 0.3% of the total value of all trades. 

When a user wants to get their money out of the liquidity pool, they have to burn their pool tokens and then they can get their money.

3.

What are the risks of DeFi liquidity pools?

The algorithm that decides how much an asset is worth could fail, slippage could happen because of big orders, smart contracts could fail, and more. 

The price of assets in a liquidity pool is set by an algorithm that keeps changing based on how much trading is going on in the pool. If the price of an asset is different from the price on the global market, arbitrage traders who make money from price differences between platforms will move to take advantage of the difference. 

When prices go up and down, liquidity providers can lose some of the value of their deposits. This is called a "temporary loss." Once a provider takes their deposit back, however, the loss is permanent. Depending on the size of the change and how long the liquidity provider has had their deposit at risk, transaction fee rewards may be able to make up for some or all of this loss. 

Smaller pools can lose money because of slippage if someone suddenly wants to make a big trade. This is because of how the pricing algorithm works. 

If the code that runs DeFi hasn't been audited or isn't fully secure, users face other risks, like smart contracts that don't work. Before you put any money in, make sure you know all the risks.

4.

What are the benefits of DeFi liquidity pools?

The most obvious benefit of liquidity pools is that they make sure that traders who want to use decentralised exchanges always have access to liquidity. They also give you the chance to make money with your cryptocurrency by becoming a liquidity provider and getting paid for transactions. 

Also, many projects and protocols will give liquidity providers extra incentives to make sure that their token pools stay big. This will lower the risk of slippage and make trading better. So, there is a chance to make more money by becoming a liquidity provider in exchange for yield farming reward tokens.

5.

How can I join DeFi liquidity pools?

Depending on the platform, there are different ways to join DeFi liquidity pools. In general, one would need to create an account on the platform of choice and then connect an Ethereum wallet like MetaMask or other Web 3.0 wallets from the homepage. Once that is done, tokens can be put into the appropriate liquidity pool. 

On platforms like MTX, a person would have to look for a specific pair they want to provide liquidity for and then connect their wallet. A user can put tokens into the pool after checking the returns, such as the pool ratio and the exchange rate.

What is Web 3.0?

Web3 is an idea, a vision, and a movement for a decentralised web that is almost free of third-party intermediaries that are run from a central location. This feature helps protect the privacy of a user's data and makes it more focused on the user instead of the platform or business. Tim Berners-Lee, who made the World Wide Web, came up with the idea in 1999. He called it a "Semantic web" that would use AI.

Before we go any further, here's a simple example to help you learn more about the decentralised web. At some point in our lives, we have all heard that our information was leaked, sold, or hacked, and nothing could be done to stop it.

Why? Even if it belongs to us, we don't own it. Once our information is online or shared through centralised digital channels, people or companies can do whatever they want with it, which has a direct effect on our everyday lives. For example, the AI could use our data and preferences to show us ads that it thinks are relevant based on what it knows about us.

But what if we really owned all the information about us and could use it however we wanted? We will be able to do this with the help of a decentralised web. Not only will we be able to do this, but we will also be able to trade, transact, communicate, and work better without the help of a government, corporation, or other influencer.

To keep its vision alive, Web3 relies heavily on cryptocurrencies and blockchain. We hear a lot these days about the NFT hype or how some countries are making crypto a legal form of currency. Even though there is no set date for when these might be used, we can still see many companies and platforms building the infrastructure pieces that are important to Web3. For example, Konstellation is a platform that wants to make a decentralised capital market. It also lets different blockchains work together, so you can do transactions between them. It sounds interesting, doesn't it?

Everything we do today, all over the world, is based on money. At the moment, if you want to trade or transact, you need a third party. In the next few years, decentralised finance (DeFi) will be the way of the future, and platforms like Konstellation will help build hubs for DeFi.

How Will Web 3.0 Work in Real Life?

As regular people, we might not have to do much to use Web3. Organizations and platforms like Ethereum and Konstellation will take care of most of the services. If we think about it, it will be like the web version we use now, but it will be more efficient, open-source, trustless, and decentralised.

Take the case of sending money. If you need to send $1,000 to someone in another country or change it into a different currency, the process can take a long time and could cost you money. To finally finish the deal, you have to go through a long process and pay a large fee. Since Web3 will be based on blockchain and cryptocurrency, there will be a direct transfer of funds through borderless, global decentralised applications (dApps) and services. This will make the process quick and cheap.

Web 3.0: Internet of Our Online Future

The way we use language and the things we do shape who we are. We hope that the new age of the Internet will do the same for us. Even though many famous people have different ideas, Web3 is sure to change the way we use the Internet in the future once it is fully operational (currently under development).

Platforms like Konstellation are built on the same ideas and support Web3 to make it easier to use and more popular. There are many changes happening in space, and it will be interesting to see how things turn out for all of us in the days and years to come.

The Top Ten Countries For Crypto Activity

 

Based on their methodology, Chainalysis’s ‘Geography of Cryptocurrency Report for 2020’ ranked countries as follows:

1. Vietnam

2. India

3. Pakistan

4. Ukraine

5. Kenya

6. Nigeria

7. Venezuela

8. United States

9. Togo

10. Argentina

Source: https://blog.chainalysis.com/reports/2021-global-crypto-adoption-index/

On the surface, the list is surprising, but keep in mind that this is an index of adoption, not actual numbers of users, which would represent GDP per capita and population.

According to the Chainalysis Index, the top country for crypto adoption is Vietnam, a young and tech-savvy country with a speculative culture that favours gambling and investment and where remittances are a substantial component of GDP (just over 6% in 2020 according to World Bank estimates). This creates a favourable environment for bitcoin adoption.

It's not surprising that India and Pakistan are ranked second and third in the worldwide crypto adoption ranking. Remittances are essential in both nations, which have young populations, increasing mobile coverage, and growing middle classes that are well-educated and financially savvy but lack options to invest in currencies other than national currencies.

Four of the top ten countries – Nigeria, Venezuela, Argentina, and Kenya – demonstrate crypto potential as a hedge against hyperinflation to varied degrees. Except for the United States, all of the countries on the list rely heavily on remittances, for which crypto is increasingly vying with comparatively expensive conventional solutions such as Western Union or Moneygram.