Why do we need Liquidity Pools?
Like traditional stock exchanges, trading on Centralized cryptocurrency exchanges is based on the Order Book model, where buyers and sellers place orders. While buyers try to buy an asset at the lowest price possible, sellers try to sell it for as high as possible. For the trade to occur, both buyer and seller have to agree on the price.
What if neither buyer nor the seller converges on the price? Or, what if there is not enough liquidity for the order to get executed? That is where the concept of Market Makers comes into play. Market makers facilitate trading by willing to buy or sell a particular asset, thereby providing liquidity and enabling traders to trade without waiting for another buyer or seller to show up.
In Decentralized Finance (DeFi), excessive dependence on external market makers may result in transactions being relatively slow and expensive. That is something Liquidity Pools can address.
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