Today, we’re discussing What do you mean By Good liquidity and Bad liquidity? Is liquidity good or bad? What do you mean by Liquidity pools?
Good Liquidity:
A company’s liquidity indicates its ability to pay its debt obligations or current liabilities without raising external capital or taking loans. High liquidity means that the company can easily meet its short-term debts while low liquidity indicates the opposite and the company may face immediate bankruptcy.
Bad liquidity:
Low liquidity means that there are few buying and selling opportunities in the markets, and assets become difficult to trade. Liquidity of an asset can also refer to how quickly it can be converted into cash as cash is the most liquid asset of all.
Is liquidity Good or Bad?
Market liquidity is the opposite. In fact, financial markets require liquidity to ensure that traders can open and close their positions efficiently and enjoy tight bid-ask spreads. To put it simply, market liquidity actually reduces the cost of an investment.
What are Liquidity pools?
Used on popular DEXs like UniSwap, liquidity pools hold 2 specific tokens (a pair), liquidity is provided by a Liquidity Provider which could be me or you.
Liquidity providers gains a certain amount “LP Tokens” depending on how much liquidity they supplied to the pool. On UniSwap a 0.3% from every trade is spilt amongst all the different providers.
For a liquidity provider to get their initial liquidity back and any fees they have earns they most burn the LP tokens they were given.
The larger a liquidity pool the larger a trade can be without affecting the market price.
Each pair has a different liquidity pool size
Example
ETH/USDT has a pool size of: $294 Million
Whereas,
KYL/ETH has a pool size of: $6.3 million
This means that the for the same amount of ETH you’ll move each pool differently, the smaller pool will be moved more and thus the price will change more dramatically than the larger pool.
Note : When whales make a massive trade in a pair with a small liquidity pool and you see it make a massive impact on the market price.
