While the DeFi space is walking turtle walk, behemoth decentralised exchanges like Uniswap plays pivotal role to attract newbies as well as retaining existing ones. The DeFi space full of opportunity promises its outstanding returns on basis of their investment and treading strategy.
One of the ways to make money in the cryptocurrency realm is by becoming a liquidity provider or staking your money in return for incentives. There are numerous platforms are available, where one can find these fruitful products, but choosing top-notch platforms are the priorities of smart traders.
Have you ever wondered what strategies these platforms use to keep their users engaged? If so, here is the answer for you. In this article, we will learn what DEX is, how some of the top decentralized platforms have been able to attract liquidity providers.
What is DEX?
Don’t get confused with the acronym. DEX simply stands for decentralized exchange.
These decentralized exchanges are peer-to-peer marketplaces where crypto traders conduct transactions.
These exchanges try to fulfil one of crypto’s core possibilities, which is ensuring smooth transactions without the interference of traditional banks, brokers, or other intermediaries.
This development is about the unbanked, who, by means of popular DEX like Uniswap, Suchiwap, and others, can make transactions without having a bank account.
Decentralized exchanges (DEXs) are flourishing; in the first season of 2021, $217 billion worth of transactions passed through them.
Over two million DeFi dealers were active as of April 2021, a tenfold increase from the month of May 2020. Some popular DEXs are Uniswap, SushiSwap, PancakeSwap, and others.
While DEXs strive to attract liquidity providers, Bitcoin Up also provides a great opportunity to facilitate trading.
What is a Liquidity Provider?
To best understand liquidity providers, it is good to understand what and how liquidity pools work.
Have you ever imagined or asked yourself how traditional banks are able to sustain a continuous monetary transaction like they are invincible because they have some money stashed away? Or using order books? Well, yes, you can say that.
This same idea is what makes the liquidity pool interesting.
The liquidity pool is the foundational technology supporting the DeFi ecosystem. It is a large digital sum of crypto tokens locked in smart contracts and supplied by the platform’s users.
These funds are then used to support decentralized services like lending, trading, and other functions.
So, liquidity providers deposit funds in the form of crypto assets into a pool, which is used by other traders to carry out cryptocurrency swaps on exchange platforms like Uniswap,Just like traditional banks help maintain balance in the financial world, liquidity providers are the market makers.
They are businesses or people who buy and sell assets in the financial market.
These traders conduct trades to maintain supply and demand and ensure that there are enough buyers and sellers in the market, even during low market demand periods.
In return for their liquidity, liquidity providers earn rewards in the form of interest, fees, or tokens for providing liquidity to DeFi protocols.
Why are liquidity providers important?
There are many benefits to liquidity providers. One such benefit is that without liquidity providers, it will be difficult for investors to complete a trade at a reasonable price. Since they maintain the supply and demand balance, they ensure a favorable and fair price in the market.
Another important aspect of these providers is that they help in the expansion of the trading market. Due to the fact that LPs invest a large amount of capital in this pool, it increases the level of activity between buyers and sellers at the rate set by these LPs.
Additionally, prices in the marketplace will likely be more accurate, reflecting the actual worth of assets, which results in a safer market. As a result of price disparities, this increased activity may also present opportunities for traders to benefit.
How do top DEXs Attract Liquidity Providers?
According to Defilama, some of the top DEX by volume, include Uniswap, PancakeSwap, and CurveFinance, to mention a few.
These decentralized finance platforms have gained popularity in the world of cryptocurrency and blockchain. However, these top DEX, in order to ensure that they attract enough liquidity and the right liquidity providers, employ some strategies.
Some of these strategies include:
1. Providing High Liquidity Rewards
One of the key strategies that many of the top DEXs offer is high liquidity rewards or added tokens. These are awarded to LPs as rewards for ensuring a sufficient supply of assets in the liquidity pool.
For example, Curve Finance offers high yields on stablecoin liquidity pools. As a liquidity provider who supplies equal-value stablecoins like USDT and USDC to Curve’s pools, you can earn an annual percentage yield (APY) as high as 10-20%.
One interesting thing about this strategy is that it offers LPs the chance to double their yields on low-risk coins.
These returns are generated from trading fees and other juicy incentives on the platforms.
2. Offering Low Fees
In addition to providing high liquidity rewards, offering low fees is one of the tactics employed to reel in investors.
This is because, with low fees, investors or liquidity providers can maximize their profit.
For example, big decentralized exchange platforms like 1inch employ this strategy, by allowing traders to make cheap token swaps. 1 inch does this by operating across multiple DEXs like Uniswap to offer lower fees.
So, by routing through multiple DEX platforms, 1inch is able to offer users the opportunity to pay lower fees of 0.1% or less per trade across token pairs.
So as not to leave the interesting part out, this platform gives liquidity providers a certain portion of the saved fees. This allows for better rates and even circulation of the liquid pools.
3. Liquid Mining Programs
Now, one of the things is how decentralized exchanges use liquid mining programs to attract liquidity providers to their platforms.
Liquidity mining is the process by which you lend digital currency to a decentralized platform in return for bonuses.
So, for example, Serum distributed its Ethereum-backed token upon launch to desired users who were the earliest suppliers for its pool. Therefore, through staking and locking funds in the pool, Serum users were able to get their bonuses from the pool.
While Serum was able to scale over $1 billion in total value locked, the users of this platform were also able to stake higher because of the success of the DEX.
So, if you are looking for extra incentives, you might try DEX, which offers liquid mining programs.
4. Having a large and Active User Base
Having a good and strong database is necessary for any decentralized exchange to achieve its aim of being one of the best out there. One of the ways these DEX platforms achieve a strong, active user base and an engaging community, is through Airdrops.
For example, in 2020, Uniswap airdropped its UNI governance token, which gained it over 10,000 active users. While those who have at some point traded or supplied tokens on the platform also earned extra incentives.
This strategy helped Uniswap become one of the largest decentralized exchanges in terms of liquidity and volume, and other growing platforms still use this platform to this day.
5. Ensure Reliable, Innovative and Secure
For every decentralized finance platform, building trust, and ensuring reliable and fast transactions through innovative technology and security is one of the keys to ensuring loyalty from liquidity providers.
Due to various news stories on scams, rug pulls, and the like, leading Dex companies like Uniswap perform many audits of their smart contracts through firms like Trails of Bits.
For example, in 2020, Uniswap was quick to act to solve a scam problem, which prevented losses and sealed the trust of investors.
Additionally, the platform also improves on features like responsiveness and multiple trading interfaces to help users navigate the platform and enhance their trading experience.
Final Note
While this article has explained what DEX and liquidity pools are and the importance of liquidity providers to these decentralized platforms, it is imperative to note that some of the strategies employed are still being used by new decentralized exchanges.
As an investor, it is good to take advantage of this opportunity when it unfolds. It is therefore important to note that blockchain technology is still evolving, and there is still much to see and witness. Also diversification of your investment is the best trick to mitigate your losses.
