Practical use cases of Liquidity Pools
Uniswap, a DeFi protocol used to exchange cryptocurrencies, encourages the basics of using Liquidity Pools. But many other Decentralized Exchanges rely on the core principle of Liquidity Pools while differentiating themselves in terms of their practical use cases. For example, the concept behind Automated Market Makers (AMMs) doesn’t work well for assets with similar prices like stablecoins or wrapped tokens. Curve, an exchange liquidity pool on Ethereum, has managed to offer lower fees and slippage when exchanging similarly-priced assets through its implementation of a different algorithm. An automated market maker (AMM) protocol Balancer came up with the concept that Liquidity Pools don’t necessarily have to be limited to two assets. It allows up to 8 tokens in a single Liquidity pool.