What Is the ‘Liquidity Pool’ and How Does Its Depth Affect De-Pegging?
A liquidity pool is a pool of tokens locked in a smart contract that facilitates trading on a Decentralized Exchange (DEX). The pool's "depth" is the total value of assets within it.
A shallow pool cannot handle large trades without significant slippage, making it easier for a large sale to push the stablecoin price far from its peg. Deep pools resist de-pegging better.
Glossar
Decentralized Exchange
Architecture ⎊ A decentralized exchange (DEX) fundamentally diverges from traditional order book exchanges through its reliance on smart contracts and blockchain technology to facilitate peer-to-peer trading, eliminating the need for a central intermediary.
De-Pegging
Event ⎊ De-Pegging signifies the breakdown of a predetermined price relationship between a pegged asset, frequently a stablecoin in the cryptocurrency sphere, and its reference asset, typically a fiat currency like the USD.
Liquidity Pool
Pool ⎊ A liquidity pool, within the context of cryptocurrency derivatives and options trading, represents a centralized reserve of tokens locked in a smart contract, facilitating decentralized trading and price discovery.