“Liquidity pools” or liquidity reserves are one of the founding technologies of the current DeFi ecosystem. They constitute an essential part of automated market makers (AMM), lending protocols (borrow/lend), synthetic assets, on-chain insurance coverage, – the list is endless. In itself, the idea is profoundly simple. “Liquidity pools” are, basically, funds piled up together in a large digital pile. But what can you do with this stack in a non-permissioned environment, where anyone can add liquidity? Let's see how DeFi has iterated the idea of “liquidity pools” or liquidity reserves.
“Liquidity pools” or liquidity reserves are a set of funds blocked on deposit in a “smart contract”. Liquidity reserves are used to facilitate decentralized trading and lending, as well as many other functionalities that we will explore later.
Liquidity pools are the backbone of many decentralized exchanges (DEX), such as Uniswap. A type of users called liquidity providers (LPs) provide an equivalent value of two tokens in a reserve (pool) to create a market. In exchange for contributing their funds, they will earn trading commissions from the trades that take place in their “pool” or reserve, proportional to their participation in the total liquidity. Since anyone can be a liquidity provider, AMMs have made market making more accessible.
One of the first protocols to use “liquidity pools” would be Bancor, although the concept would attract more attention with the popularization of Uniswap. Other popular exchanges on Ethereum that use liquidity pools are SushiSwap and Balancer. The liquidity reserves of these platforms contain ERC-20 tokens.
Other similar equivalents on Binance Smart Chain (BSC) are PancakeSwap BakerySwap BurgerSwap - whose pools contain BEP-20 tokens.
To use Binance's Liquidity Pool, you must first add liquidity to a pool. To do so, log in to your Binance account and click [Earn] > [Liquidity Farming]. Then click [Liquidity] to enter the Liquidity Farming page. Click [Add] in the Liquidity box, select the liquidity pool you want, and choose the pool type (two tokens or one token). Read and accept the Terms of Use