Since many peoples are still wondering about DeFi, Farming and Staking, but in fact many user are interested to know about it. Therefore don't worry, because today I would like to explain you about DeFi in a very easy and simple manner such that everyone can understand this term easily. In next post, I will explain you about farming and staking.
What is DeFi?
DeFi is Decentralized Finance. DeFi or Decentralized Finance is a financial system such as Bank but it doesn't have any control by individual entities. In general, DeFi is place for smart execution of contracts, also for deposits, loans, and financial transaction. Also DeFi is free of third party interventions. However, In DeFi everything is done automatically via Smart Contract on BSC (Binance Smart Chain) and Ethereum Network, many more and so on. Lastly, Nobody has a control over the collected deposits and all the funds are saved securely on the Smart Contract.
Liquidity Provider for AMM
LPs is also knows as Liquidity Providers. Market Maker of any token. Liquidity Provider is a market maker that determines price of a token so that the token have certain value in the market. For example, there is a ETH-USDC market that has a Liquidity Provider of 100 ETH + 1,00,000 USDC, it means the price of ETH is 1000 USDC.
Why is Liquidity Important?
Liquidity is important for market to be stable. Also makes more difficult to pump or dump a price of any token. In general, Liquidity Providers will get rewards from the transactions that happened on that market, the rewards usually about 0.15-0.3% from the transaction volume. All rewards will be distributed smoothly to all LPs in market ecosystem. Liquidity Providers gets rewards from transaction and LPs are very important for stable market.
How to Add Liquidity
It's very easy and same like swapping on any DEXs. Adding liquidity is done directly by the wallet users to the smart contract. When you adding liquidity, you needs 2 tokens with the same value. For example, for CAKE-USDT-LP market you need to have same CAKE and USDT value. Also there is no need of third parties. For Example, 1 CAKE worth $30 and USDT worth $30 and you will get TOKEN-LP (a kind of liquidity stock) from the market. Basically, Liquidity addition is easy and need same value of token.
Thanks for reading. Have a fun!