What are liquidity pools used for?
Pooling liquidity is a profoundly simple concept, so it can be used in a number of different ways.
- One of these is yield farming or liquidity mining. Liquidity mining has been one of the more successful approaches. The tokens are distributed algorithmically to users who put their tokens into a liquidity pool. Then, the newly minted tokens are distributed proportionally to each user’s share of the pool.
- Another emerging DeFi sector is insurance against smart contract risk.
- Another, even more cutting-edge use of liquidity pools is for tranching.
- Minting synthetic assets on the blockchain.
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