Thoughts about Liquidity Pools: "Should I Put Money in a Liquidity Pool?"

I had a conversation about Liquidity Pools earlier today, mainly about the benefits of putting money into Leodex's Liquidity Pools. I decided to make a clean version of my response in a long-form article. (Read the original conversation here.)

Should I Put Money in a Liquidity Pool?

Liquidity Pools are what decentralized exchanges like Leodex.io use to allow users to swap from one cryptocurrency to another. Each pool is compromised of two tokens, holding the same value of each at any point in time!

If you're interested in how they work I recommend researching on Google.

When you put money in a Liquidity Pool, you get a share% in the Liquidity Pool. When you take your tokens out of the Liquidity Pool, you take out the same % of the pool as you put in.

So, if the pool got bigger between the time you first put money in and out, you've gained money in profit.

How does the pool get bigger? By collecting fees from every swap transaction that happens on it.

So, in theory, as long as people keep using the pool. It'll keep accumulating fees and add them to the value of each token that makes up the pool. When you take your Liquidity out, you'll have more of these tokens than you put in.

Is there a Chance I Lose Money?

There are ways to lose money when you put them in the liquidity pools. For example, if one or both token's prices have dropped. You'll get out less value, even if the amount of each token you have increased.

Also, putting the tokens in the pool, and taking them out requires transaction fees. So you must keep that in mind. There might also be ways for the pool to lose money that I'm not aware of.

The LEO/CACAO Pool

The main pool of Leodex is the LEO/CACAO pool. This pool is used for any $LEO or $HIVE transaction, makes it really attractive to have a share in. I put some of my tokens in the LEO/CACAO pool, hoping that the team behind the project makes it a success!

For the Future

The fees the pool takes from transactions isn't a lot, so for you to gain any good amount of profit, the pool needs to be used thousands of times by many users... Leodex is NOT that big yet, so putting money now is only worth it if you think leodex will become big in the future.

If you believe leodex will become big in the future, putting money early is a great idea because you'll have bigger % of the pool the earlier you get on.

Thanks for Reading

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