Single sided liquidity pools are a tool that decentralized platforms essentially created to be able to fund the market. They allow investors a chance to serve as a lender to the market itself. These liquidity pools are smart contracts that are run by a particular platform. As an investor you have the chance to get in on these pools by buying tokens, and adding them to the pool. How do you make money as an investor? That’s what we are going to go over in this article.
How To Make Money With Single Sided Liquidity Pools?
Liquidity pools in the crypto space were created as a way to then be able to issue crypto derivatives. Since there are obviously no banks in a decentralized financial system there needed to be somewhere to go if investors needed to borrow funds for a transaction. Since there’s a very limited number of issued tokens in any crypto currency this happens rather often. What liquidity pools essentially allow users to do is to serve as a bank or financial institution. At least that’s what we call them in the regular banking system. In reality, all that you are is a lender.
The way that you make money is rather simple. You can invest in a liquidity pool by essentially tokens to the pool. For example, you can invest in an ETH pool. So what you’ll do is buy ETH tokens, and transfer them to the pool. That’s going to give you a percentage of that particular pool. When the market needs to borrow a particular token and uses your pool to fund a transaction you’ll get paid interest rates on your tokens.
Are Liquidity Pools A Safer Investment Than Trading?
You can certainly make the argument that they are. They are definitely a safer investment for people who don’t have the time to be glued to a computer all day. When you’re trading you can be making predictions on the price multiple times a day. Sure, that creates more opportunities to increase your overall income. At the same time though you may be running way more risks. By putting your money in a liquidity pool you’ll be able to earn money as you would with a long term investment in ETH. Plus, you’ll be earning interest payments on the “cash” that your liquidy pool lends out. Having said this, the clearer argument would be to say that liquidity pools are a much better investment than just your regular long term holding investment on a crypto currency.
What’s the downside to liquidity pools? Obviously the down side is to be caught with your hand in the cookie jar when the price of a particular token drop. When the price for a token drop though, that’s a perfect time to get into liquidity pools. Since you’ll have the opportunity to buy a larger stake in the pool at a lower price. It’s important to understand the withdrawal conditions in liquidity pools before investing any money in them!