![]() This means it’s the middle point between what sellers are willing to sell the asset for and the price at which buyers are willing to purchase it. This market order price that is used in times of high volatility or low volume in a traditional order book model is determined by the bid-ask spread of the order book for a given trading pair. Slippage is most common during periods of higher volatility, and can also occur when a large order is executed but there isn't enough volume at the selected price to maintain the bid-ask spread. Slippage is the difference between the expected price of a trade and the price at which it is executed. Whether it’s a low cap cryptocurrency or penny stock, slippage will be a concern when trying to enter - or exit - any trade. Why Are Crypto Liquidity Pools Important?Īny seasoned trader in traditional or crypto markets can tell you about the potential downsides of entering a market with little liquidity.The more assets in a pool and the more liquidity the pool has, the easier trading becomes on decentralized exchanges. AMMs fix this problem of limited liquidity by creating liquidity pools and offering liquidity providers the incentive to supply these pools with assets, all without the need for third-party middlemen. ![]() At that time, DEXs were a new technology with a complicated interface and the number of buyers and sellers was small, so it was difficult to find enough people willing to trade on a regular basis. Liquidity pools provide much-needed liquidity, speed, and convenience to the DeFi ecosystem.īefore automated market makers (AMMs) came into play, crypto market liquidity was a challenge for DEXs on Ethereum. ![]() Liquidity pools are a mechanism by which users can pool their assets in a DEX’s smart contracts to provide asset liquidity for traders to swap between currencies.
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