Liquidity is a concept that pops up often in the world of finance, and it’s just as important in the Web3 space, especially with the rise of decentralized finance (DeFi). In simple terms, liquidity refers to how easily you can buy or sell an asset like a cryptocurrency, without drastically changing its price.
To put it in everyday language, imagine you’re at a market selling apples. If there are plenty of buyers ready to purchase your apples at the current price, then your apples are more “liquid.” You can sell them quickly, and you don’t have to drop the price to attract a buyer. However, if there are only a few buyers, you might have to lower the price or wait a while to sell your apples. In that case, your apples are less liquid.
Sellers and buyers are both necessary for any market to work effectively; the concentration of each of them influences the market in many different ways.
In Web3, liquidity applies to digital assets like cryptocurrencies and tokens. High liquidity means people can trade their tokens quickly, while low liquidity means it’s harder to find someone to trade with, and you may need to wait longer or accept a worse deal.
Why is Liquidity Important in Web3?
Liquidity plays a big role in how smoothly decentralized markets and applications function. Here’s why liquidity is crucial in the Web3 world:
Efficient Trading: High liquidity means you can easily trade your tokens without slippage (the difference between the expected price of a trade and the actual price). If liquidity is low, prices can swing drastically after each trade, creating an inconsistent and unpredictable market.
Fair Prices: In liquid markets, prices tend to be more stable and reflective of real value. With low liquidity, even small trades can cause big price movements, making it harder to predict what you’ll pay or receive for a token. This is why with tens of thousands of altcoins in existence, the vast majority of them have proven so volatile from one day to the next.
User Experience: Web3 applications like decentralized exchanges (DEXs) need liquidity to offer fast and reliable services. If liquidity is low, users may experience delays or unfavorable prices when trading tokens, which can discourage participation in that exchange. For a decentralized exchange like Uniswap to compete with a centralized (privately owned) exchange like Coinbase, liquidity is used to create equally convenient trading activities for users.
How Does Liquidity Work in Web3?
In Web3, liquidity typically comes from two main sources:
Liquidity Providers (LPs): In decentralized finance (DeFi), liquidity often comes from regular users who deposit their crypto into a liquidity pool. These users are called liquidity providers. By contributing their tokens to the pool, they help create liquidity, which allows others to trade. In return, liquidity providers earn rewards like a share of the trading fees. Typically, a liquidity provider contributes to a liquidity pool by providing an equal-value amount of both tokens involved in that exchange pairing.
Liquidity Pools: A liquidity pool is a smart contract that holds funds to facilitate trading between different cryptocurrencies on a decentralized exchange. For example, if someone wants to trade Ether (ETH) for a stablecoin like USDC, the liquidity pool allows them to do so without needing a direct buyer or seller. The more funds in the pool, the easier and quicker trades can be made.
Think of liquidity pools like communal pots of money that people can use to trade tokens with each other. The bigger the pot (more liquidity), the easier it is for everyone to trade, and with larger amounts at a time.
Examples of Liquidity in Web3
Uniswap and Liquidity Pools: One of the most popular platforms in DeFi, Uniswap, allows users to swap between different tokens by tapping into liquidity pools. Users provide liquidity by depositing pairs of tokens (like ETH and USDC) into the pool. In return, they receive a percentage of the fees generated when other users make trades.
Stablecoins as Liquid Assets: Stablecoins like USDC or DAI are often considered highly liquid because they are widely used and can be easily exchanged for other tokens. Their prices are stable, which makes them ideal for providing liquidity in many DeFi applications.
NFT Liquidity: Liquidity doesn’t just apply to cryptocurrencies—it also applies to NFTs (non-fungible tokens). Some platforms are experimenting with ways to create more liquidity for NFTs by letting users fractionalize them, meaning they split the NFT into smaller pieces that can be traded more easily.
Liquidity Mining and Yield Farming
In the Web3 world, liquidity mining or yield farming is a way that people are incentivized to provide liquidity to a decentralized platform. Essentially, liquidity providers earn rewards, usually in the form of extra tokens, for depositing their assets into a liquidity pool.
For example, if you deposit your crypto into a liquidity pool on Uniswap, you may receive Uniswap’s governance token ($UNI) as a reward. This is a reward incentive, a way to encourage more liquidity, keeping decentralized exchanges running smoothly.
Why Liquidity Matters for Web3 Projects
For Web3 projects to thrive, they need liquidity. Without it, users would struggle to trade tokens or interact with decentralized applications (dApps). Here are a few key reasons why liquidity is critical:
Smooth Functioning of DEXs (Decentralized Exchanges): DEXs rely heavily on liquidity pools. Without enough liquidity, users can’t easily swap tokens, which disrupts the whole system.
Trust and Adoption: High liquidity signals trust in a project. If a project has deep liquidity, more users are likely to join, trade, and use the platform. On the other hand, low liquidity can deter users because they may worry about the stability and usability of the platform.
Price Stability: More liquidity means token prices are more stable and less likely to be affected by large trades. This creates a healthier market and attracts both casual and serious investors.
Common Liquidity Terms in Web3
Liquidity Provider (LP): A user who contributes tokens to a liquidity pool to facilitate trading on a decentralized exchange.
Liquidity Pool: A smart contract that holds tokens to enable decentralized trading between two or more cryptocurrencies.
Slippage: The difference between the expected price of a trade and the actual price. High slippage happens in low-liquidity environments.
Liquidity Mining/Yield Farming: The process of earning rewards for providing liquidity to a platform or decentralized exchange.
Impermanent Loss: A potential risk for liquidity providers. This occurs when the price of the deposited tokens changes compared to when they were deposited, leading to lower value when they’re withdrawn.
The Lifeblood of Web3
Liquidity is crucial to making decentralized platforms work efficiently. Whether it’s enabling quick and cheap token swaps, stabilizing prices or collecting rewards through liquidity mining, liquidity plays a huge role in Web3 ecosystems.
For those new to the Web3 world, understanding liquidity can help you make better decisions when participating in DeFi platforms, trading tokens or even providing liquidity yourself for passive rewards.
🐾Get your paws ready, because our latest Telegram mini app game Gala Meow Coin has just dropped! 😻
Part of the epic $TREZ ecosystem, this purr-fectly crafted tapper game lets you tap, collect and claw your way to the top. Whether you’re a die-hard degen or just a sucker for adorable kitties, Meow Coin is the next level of fun (and FOMO).
Who Can Play?
Like all our Telegram mini app games, anyone with a free Telegram account can play as much as they want, 100% free! You don’t even have to download anything– the game is launched right through Telegram with the help of the most adorable Gala Meow Coin Bot!
How it Works
🐱 Tap your way to the top: Complete quests, tackle tasks and upgrade your kitty power. 😸 Bring your fur-ends: Invite your friends for extra in-game coins and rewards! 😸 Chase the leaderboard: The most dedicated tappers will secure prime spots, giving them a chance to claw into that juicy daily $TREZ distribution!
With every tap, you’re setting yourself up for serious rewards once $TREZ hits the scene. That’s right, your Meow Coin game stats will factor into the initial $TREZ seasonal distribution. So, don’t snooze like a lazy cat—get tapping and collect those in-game coins while the rest of the litter watches in envy. 🐾
You don’t want to be the last cat in line when the $TREZ rewards start flowing. Ready to dominate? Or are you going to let the other cats lap up all the cream?
Gala Music is thrilled to announce the launch of the LabelRadar & Gala Music “NextUp” Contest, an exciting competition for emerging artists to showcase their talent and make their way into the web3 music world!
Partnering with LabelRadar, Gala Music invites aspiring musicians to submit their original tracks for a chance to win cash prizes, Mystery Box track features, professional music production software packages and a 5% revenue share for Mystery Box sales!
Submission Details
Open Date: Tuesday, Sept 24, at 12pm PT
Close Date: Sunday, Oct 13, at 11:59 pm PT
Eligibility: Artists must be at least 18 years old to enter
How to Enter
Artists can submit their original tracks via this Gala Music landing page, which will guide them to the submission portal, powered by LabelRadar. If you’re an aspiring artist, this competition is an incredible opportunity to elevate your music and gain exposure to Gala Music’s extensive fanbase.
Judging Process
Well-known artists Macy Gray and PLS&TY, along with key members of the Gala Music staff, will serve as judges to select the top 10 submissions. Each selected artist will then be asked to create a Gala Music Artist Profile and submit their track for release, which will then enter them in the NextUp Voting System.
Voting & Prizes
The top 10 artists will battle it out to become the community favorites, encouraging their supporters to vote for them on the Gala Music platform. Every account gets a free weekly vote, but users can also spend $MUSIC to unlock additional votes.
NextUp voting on Gala Music will last for one week, opening on Friday, October 18th at 12pm PT and closing on Friday, Oct 25, at 12pm PT.
Top 5
The top 5 artists with the most votes will each receive $1,000 and their song will be featured in a special NextUp Mystery Box, slated for release in November. These songs will become Gala Music exclusives indefinitely, with winners also getting a chance to share in the revenue generated from Mystery Box sales.
Final 3
Additional prizes for 1st, 2nd and 3rd place vote counts will include music production software packages from leading music brands such as GForce, Ujam, Ace Studio and more.
The 1st place package is valued at ~$5200. The 2nd place package is valued at ~$1980. The 3rd place at ~$1380.
Don’t miss out on this unique chance to break into the industry and get discovered! Submit your track now and be the next rising star on Gala Music.
Come warm yourself by the fire, and let us discuss the growth of this great land. Hill, tree and mountain are but a stage… tis Exemplars that truly bring Mirandus to life.
Mirandus Town Hall
You are cordially invited to our upcoming Town Hall, adventurer. Join us as we discuss the state of Mirandus and where the future will lead us.
This gathering takes place at 11am PT on September 26th. All are welcome to come discuss the glorious land that is Mirandus!
Click above to make sure you’re notified when we get started.
Layer 2 (L2) blockchains are solutions built on top of an existing Layer 1 (L1) blockchain (like Ethereum) to improve its performance. In simpler terms, if the blockchain was a road, Layer 1 would be the main highway, and Layer 2 would be like a smaller, parallel road built to ease traffic on the highway. The goal of Layer 2 chains is to make transactions faster, cheaper and more scalable.
Why Do We Need Layer 2?
Blockchains, especially popular ones like Ethereum or Bitcoin, often face issues like slow transactions and high fees when too many users are trying to make transactions at once. This is because every transaction has to be processed by all the computers (or “nodes”) in the network, potentially slowing things down and making performance inconsistent.
Layer 2 chains help solve this by processing transactions separately from the main blockchain, reducing the workload on Layer 1. Once the transactions are bundled or “rolled up,” they are sent back to the main blockchain, significantly speeding up the process.
How Do Layer 2 Solutions Work?
Layer 2 solutions relieve some of the main blockchain’s burden, allowing users to conduct transactions without congesting the main network. Here’s a breakdown of how this works:
Transaction Bundling: Multiple transactions are grouped together.
Processing Off-Chain: These transactions are processed “off-chain,” meaning they don’t happen directly on Layer 1.
Settlement on Layer 1: After processing, the result of these transactions is sent back to the main blockchain, reducing the load.
An easy analogy would be an amusement park with long lines for rides (the Layer 1 blockchain). Layer 2 would be a fast pass line that processes smaller groups more quickly, then checks them in with the main system.
Polygon (formerly Matic): One of the most well-known Layer 2 solutions for Ethereum, Polygon uses a technology called “sidechains” to help Ethereum scale. Polygon runs alongside Ethereum, processes transactions off-chain and then updates the Ethereum blockchain with the results.
Arbitrum: This uses a method called “rollups” to bundle transactions together, verify them off-chain and then submit the summary to Ethereum. It helps reduce costs and speed up transactions.
Optimism: Similar to Arbitrum, Optimism uses rollups to bundle transactions and reduce the cost of using Ethereum while keeping the security benefits of Layer 1.
Why is Layer 2 Important for Web3?
In the Web3 world, where decentralized applications (dApps), smart contracts, and DeFi (decentralized finance) platforms are booming, scalability and low transaction costs are critical. If users have to wait a long time or pay high fees every time they want to interact with a blockchain, mass adoption becomes much more challenging.
Layer 2 solutions are important because they offer:
Scalability: More transactions can be processed, allowing blockchains to handle millions of users at once.
Reduced Costs: Since fewer transactions are processed directly on Layer 1, the fees (often called “gas fees”) can be significantly lower.
Faster Transactions: Moving some of the work off-chain means transactions can often happen in seconds or minutes instead of hours.
Layer 1 vs. Layer 2 and Beyond
Layer 1 (L1): This is the foundation, or main blockchain, like Ethereum, Bitcoin or GalaChain. It provides the most security but often struggles with speed and high costs as it grows in popularity.
Layer 2 (L2): These are secondary systems that sit on top of Layer 1 and help by processing transactions faster and more efficiently without compromising too much on security.
Think of Layer 1 as a big city with traffic congestion. Layer 2 is like a fast train running above ground to take people out of the crowded streets and speed up their commute. The existence of this train benefits not only the riders of the train, but the car commuters as well, who can then enjoy less congested streets below.
In a world where blockchain usage is growing daily, the technology needs to scale quickly. Layer 2 solutions are not just an option but a necessity for the future of Web3. They ensure that decentralized platforms can function smoothly without making users deal with high fees or slow transaction times.
With the rise of popular Layer 2 solutions like Polygon and Arbitrum, users can look forward to a blockchain world where interacting with decentralized apps and services is as seamless as using traditional web apps—fast, cheap, and scalable.
GalaChain is a Layer 1 blockchain with the potential for integrated Layer 2 systems. Once the GalaChain ecosystem is used by enough external developers and users, organization will be streamlined through the use of multiple layers.
