Liquidity is the measure by which one asset can be exchanged for another of equal value.
Without liquidity, crypto traders would have to wait for their orders to be fulfilled from a matching offer.
By that time, the price of the asset might have shifted. Liquidity pools utilize smart contracts and enable users to buy and sell crypto on decentralized exchanges without the need for centralized market makers. Users, called liquidity providers, add an equal value of two tokens in a pool to create a market.
In exchange for providing their funds, they earn trading fees from their pool, proportional to their share of the total liquidity.
Liquidity pools exist for a wide range of assets because they can be user-created. Their low fees and non-custodial nature attract traders. Liquidity providers can also suffer losses from exposure to risks.
Impermanent loss occurs when the price of a pool’s tokens changes compared to when they were deposited.
The more significant the change, the bigger the loss. Smart contract risks occur when there is a bug in the contract’s source code, leaving coins vulnerable to losses for good.
CertiK’s Skynet and smart contract audits reduce risk by inspecting a contract’s source code and allow for liquidity monitoring on Skynet’s page.
