Decentralized Liquidity Is the Backbone of DeFi

One of the most interesting recent developments in cryptocurrency is the emergence of decentralized liquidity pools.

Algorithmic-based smart contract liquidity pools such as Ethereum’s Uniswap, or privacy-focused, off-chain decentralized exchanges such as Starkware’s StarkDEX are just two examples of projects leading the charge.

Inbound/outbound liquidity is essential for the creation and growth of financial markets. Price discovery, and the ability to move in and out of trade positions, whether they’re from a big institutional firm, or a small-time trader, remains key if crypto is to reach maturity; where its aggregate daily volume could sustain at levels comparable to the legacy financial system.

It is not exactly a secret that the blockchain and cryptocurrency industries have a liquidity problem. Large trades in all but the most popular assets move the market to an alarming degree. This volatility then causes a cascade of ills.

First, it decreases the credibility of the markets due to the reality or appearance of manipulation.

Second, it makes people nervous about holding assets, meaning that applications dependent on low volatility have trouble getting off the ground.

Third, it harms the viability of decentralized exchanges and other decentralized token economies because insofar as they depend on slow mainnets, they lag badly behind the price information available on faster, more efficient centralized exchanges.

Decentralized payments are just one piece of the puzzle of what it really means to be decentralized, as you’ll also need the assistance of decentralized liquidity to build and extend additional functional financial layers on top of your blockchain-related protocol/application. Liquidity is king, and it can make or break your protocol if you cannot rally sufficient liquidity to aid in your project’s growth and enable the use cases you sought out to provide your end-users.

With the proliferation of decentralized lending, borrowing, and more, the current decentralized landscape appears to be grasping the basic essentials necessary for the financial instruments we’ve grown familiar with in traditional legacy markets (Compound Finance is but one example). To better understand where we’re at, let’s first go deeper into what solutions the industry has concocted thus far.