Why do we need Liquidity Pools in DeFi?
Most of the familiar crypto exchanges work on the basis of the Order Book Model, where buyers and sellers come together and place an order. And there come market makers who facilitate the trading by always willing to buy/sell assets. This makes the users trade anytime without waiting for any counterparties by providing high liquidity.
This same concept of market makers or liquidity pools can also be implemented in Decentralized Finance to reduce the issues of liquidity in DeFi. Without market makers, any platform would become illiquid and unusable for users of the platform. Since, most of the DeFi platforms are on Ethereum, which collects Gas fees for each and every transaction on smart contracts, which can make transactions cost-effective and may face many liquidity issues.
Thus, the involvement of DeFi liquidity pools can play a vital role in maintaining liquidity in decentralized finance.
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