Recently we summed up all you need to know about Automatic Market Makers. Get to know their key element- liquidity pools. How do they work and what do you need to know before you decide to implement them into your decentralized exchange?

What will you find in the article?

Role of liquidity pools in AMM
Why liquidity pools are essential for DEXs
How does liquidity pool work?
LP tokens
How to use liquidity pools?

Definition

Liquidity pools are digital assets managed by smart contracts that enable trades between different tokens or cryptocurrencies on Decentralized Exchanges. Assets are deposited there by liquidity providers - investors and users of the platform.

Liquidity pools are a backbone of Automatic Market Maker, which replaces one side of a trade with an individual liquidity pool.

Decentralized Exchanges: Liquidity Pools

Liquidity pools are among the most robust solutions for contemporary DeFi ecosystems. Currently, most DEXs work on the Automatic Money Maker model, and liquidity pools are a crucial part of it.

To fully understand the importance of DeFi liquidity pools, we should first look at variable ways in which DEXs can handle trading.

How do decentralized exchanges operate trading?

On-chain order book
Off-chain order book
Automated Market Maker

Currently, the last of them seems to be the most effective. Therefore the vast majority of modern DEXs are based on it. Since liquidity pools are its backbone, their importance in the DeFi sector is undeniable.

Problems with ordering books

Before launching the first automated market makers, liquidity was a significant issue for decentralized exchanges, especially for new DEXs with a small number of buyers and sellers. Sometimes it was simply too difficult to find enough people willing to become a side in trading pair.

In those cases, the peer-to-peer model didn’t support liquidity on a sufficient level. The question was how to improve the situation without implementing a middle man, which would lead to losing the core value for the DeFi ecosystem - decentralization. The answer came with AMM.

Trading pairs

Let’s use the example of Ether and Bitcoin to describe how trading pairs work in the order book model on DEX.

If users want to trade their ETH for BTC, they need to find another trader willing to sell BTC for ETH. Furthermore, they need to agree on the same price.

While in the case of popular cryptocurrencies and tokens, finding a trading pair shouldn’t be a problem, things get a bit more complicated when we want to trade more alternative assets.

The vital difference between order books and automatic market makers is that the second one doesn’t require the existence of trading pairs to facilitate trade. All thanks to liquidity pools.

Role of liquidity pool in AMM

Automated Market Maker (AMM) is a decentralized exchange protocol that relies on smart contracts to set the price of tokens and provide liquidity. In an automated market makers' model, assets are priced according to a pricing algorithm and mathematical formula instead of the order book used by traditional exchanges.

We can say that liquidity pools are a crucial part of this system. In AMM trading pair that we know from traditional stock exchanges and order book models is replaced by a single liquidity pool. Hence users trade digital assets with a liquidity pool rather than other users.

P2P VS P2C

Peer-to-peer is probably one of the best-known formulas from the DeFi ecosystem. For a long time, it was a core idea behind decentralized trading.

Yet blockchain technology improvement and the creativity of developers brought new possibilities. P2C - peer-to-contract model puts smart contracts as a side of the transaction. Because smart contract can’t be influenced by any central authority after it was started, P2C doesn’t compromise decentralization.

Essentially Automated Market Makers is peer-to-contract solutions because trades take place between users and a smart contract.

Liquidity providers

Liquidity pools work as piles of funds deposited into a smart contract. Yet, where do they come from?

The answer might sound quite surprising: pool tokens are added to liquidity pools by the exchange users. Or, more precisely, liquidity providers.

To provide the liquidity, you need to deposit both assets represented in the pool. Adding funds to the liquidity pool is not difficult and rewards are worth considering. The profits of liquidity providers differ depending on the platform. For instance, on Uniswap 0.3% of every transaction goes to liquidity providers.

Gaining profits in exchange for providing liquidity is often called liquidity mining.

How do liquidity pools work?

Essentially, the liquidity pool creates a market for a particular pair of assets, for example, Ethereum and Bitcoin. When a new pool is created, the first liquidity provider sets the initial price and equal supply of two assets. This concept of supply will remain the same for all the other liquidity providers that will eventually decide to stake their found in the pool.

DeFi liquidity pools hold fair values for assets by implementing AMM algorithms, which maintain the price ratio between tokens in the particular pool.

Different AMMs use different algorithms. Uniswap, for example, uses the following formula:

a * b = k

Where 'a' and 'b' are the number of tokens traded in the DeFi liquidity pool. Since 'k' is constant, the total liquidity of the pool must always remain the same. Different AMMS use various formulas. However, all of them set the price algorithmically.

Earning from trading fees

A good liquidity pool has to be designed to encourage users to stake their assets in it. Without it supplying liquidity on a sufficient level won't be possible.

Therefore most exchanges decide on sharing profits generated by trading fees with liquidity providers. In some cases (e. g., Uniswap), all the fees go to liquidity providers. If a user's deposit represents 5% of the assets locked in a pool, they will receive an equivalent of 5% of that pool’s accrued trading fees. The profit will be paid out in liquidity provider tokens.

Liquidity provider token (LP token)

In exchange for depositing their tokens, liquidity providers get unique tokens, often called liquidity provider tokens. LP tokens reflect the value of assets deposited by investors. As mentioned above, those tokens are often also used to account for profits in exchange for liquidity.

Normally when a token is staked or deposited somehow, it cannot be used or traded, which decreases liquidity in the whole system. That’s problematic, because as I mentioned, liquidity has a pivotal value in the DeFi space.

LP tokens enable us to liquid assets that are staked and normally would be frozen until providers will decide to withdraw them. Thanks to LP tokens, each token can be used multiple times, despite being invested in one of the DeFi liquidity pools.

Furthermore, it opens new possibilities related to indirect forms of staking.

Yield Farming

Yield farming refers to gaining profits from staking tokens in multiple DeFi liquidity pools. Essentially liquidity providers can stake their LP tokens in other protocols and get for it other liquidity tokens.

How does it work?

Actually, from the user perspective, it's quite simple:

Deposit assets into a liquidity pool
Collect LP tokens
Deposit or stake LP tokens into a
Separate lending protocol
Earn profit from both protocols

Note: You must exchange your LP tokens to withdraw your shares from the initial liquidity pool.

How to use Liquidity pools in your DEX?

Decentralized finance develops at tremendous speed, constantly bringing new possibilities. The number of people interested in DeFi investments increases every day; hence the popularity of options such as liquidity mining recently has grown significantly. While deciding to launch our DEX, you have to be aware of that.

As I mentioned, liquidity has pivotal importance for decentralized finance, particularly for exchanges. Liquidity pools can't exist without investors that will add liquidity to them. Their shortage will lead to low liquidity. In consequence, that will be a cause of the low competitiveness of the exchange. On the other hand, for new DEXs it's still easier than attracting enough buyers and sellers to support order book trading.

Implementing liquidity pools to your DEX requires not only experience of blockchain developers’ fluently using DeFi protocols but also a solid and well-planned business strategy. That's why choosing a technology partner with previous experience with both blockchain development and business consulting in the decentralized finance field might be the optimal solution.

Do you want to gain more first-hand knowledge regarding liquidity pools development and implementation? Don't hesitate to ask our professionals that will gladly answer your questions.

Blockchain for Creators: Secure and Sustainable Infrastructure

Miłosz Mach

07 Nov 2025

Blockchain for Creators: Secure and Sustainable Infrastructure

In today’s digital creative space, where the lines between art and technology are constantly blurring, projects like MARMALADE mark the beginning of a new era - one where creators can protect their work and maintain ownership through blockchain technology.

For Nextrope, being part of MARMALADE goes far beyond implementing features like screenshot blocking or digital watermarking. It’s about building trust infrastructure - systems that empower creators to thrive in the digital world safely and sustainably.

A new kind of blockchain challenge

Cultural and educational projects come with a completely different set of challenges than typical DeFi systems. Here, the focus isn’t on returns or complex smart contracts - it’s on people: artists, illustrators, educators.

That’s why our biggest task was to design secure yet intuitive infrastructure - lightweight, energy-efficient, and accessible for non-technical users exploring Web3 for the first time.

“Our mission wasn’t to build another financial protocol. It was to create a layer of trust for digital creators.”
— Nextrope Team

Security that stays invisible

The best security is the kind you don’t notice.
Within MARMALADE, we focused on making creators' protection seamless:

Screenshot blocking safeguards artworks viewed in browsers.
Dynamic watermarking helps identify unauthorized copies.
Blockchain registry ensures every proof of ownership remains transparent and immutable

“Creators shouldn’t have to think about encryption or private keys - our job is to make security invisible.”

Sustainability by design

MARMALADE also answers a bigger question - how to innovate responsibly.
Nextrope’s infrastructure relies on low-emission blockchain networks and modular architecture that can easily be adapted for other creative or cultural initiatives.

This means the technology built here can support not only artists but also institutions, universities, and educators seeking to integrate blockchain in meaningful ways.

Beyond technology

For Nextrope, MARMALADE is more than a project — it’s proof that blockchain can empower culture and creators, not just finance. By building tools for digital artists, we’re helping them protect their creativity and discover how technology can amplify human expression.

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Plasma blockchain. Architecture, Key Features & Why It Matters

Miłosz Mach

21 Oct 2025

Plasma blockchain. Architecture, Key Features & Why It Matters

What is Plasma?

Plasma is a Layer-1 blockchain built specifically for stablecoin infrastructure combining Bitcoin-level security with EVM compatibility and ultra-low fees for stablecoin transfers.

Why Plasma Blockchain Was Created?

Existing blockchains (Ethereum, L2s, etc.) weren’t originally designed around stablecoin payments at scale. As stablecoins grow, issues like congestion, gas cost, latency, and interoperability become constraints. Plasma addresses these by being purpose-built for stablecoin transfers, offering features not found elsewhere.

Zero-fee transfers (especially for USDT)
Custom gas tokens (separate from XPL, to reduce friction)
Trust-minimized Bitcoin bridge (to allow BTC collateral use)
Full EVM compatibility smart contracts can work with minimal modifications

Plasma’s Architecture & Core Mechanisms

EVM Compatibility + Smart Contracts

Developers familiar with Ethereum tooling (Solidity, Hardhat, etc.) can deploy contracts on Plasma with limited changes making it easy to port existing dApps or DeFi, similar to other EVM-compatible infrastructures discussed in the article „The Ultimate Web3 Backend Guide: Supercharge dApps with APIs".

Gas Model & Token Mechanism

Instead of forcing users always to hold XPL for gas, Plasma supports custom gas tokens. For stablecoin-native flows (e.g. USDT transfers), there is often zero fee usage, lowering UX friction.

Bitcoin Bridge & Collateral

Plasma supports a Bitcoin bridge that lets BTC become collateral inside smart contracts (like pBTC). This bridges the security of Bitcoin with DeFi use cases within Plasma.
This makes Plasma a “Bitcoin-secured blockchain for stablecoins".

Security & Finality

Plasma emphasizes finality and security, tuned to payment workloads. Its consensus and architecture aim for strong protection against reorgs and double spends while maintaining high throughput.
The network launched mainnet beta holding over $2B in stablecoin liquidity shortly after opening.

Plasma Blockchain vs Alternatives: What Makes It Stand Out?

Feature	Plasma (XPL)	Other L1 / L2
Stablecoin native design	✅	usually second-class
Zero fees for stablecoin transfers	✅	rare, or subsidized
BTC bridge (collateral)	✅	only some chains
EVM compatibility	✅	yes in many, but with trade-offs
High liquidity early	✅ (>$2B TVL)	many chains struggle to bootstrap

These distinctions make Plasma especially compelling for institutions, stablecoin issuers, and DeFi innovators looking for scalable, low-cost, secure payments infrastructure.

Use Cases: What You Can Build with Plasma Blockchain

Stablecoin native vaults / money markets
Payment rails & cross-border settlement
Treasury and cash management flows
Bridged BTC-backed stablecoin services
DeFi primitives (DEX, staking, yield aggregation) optimized for stablecoins

If you’re building any product reliant on stablecoin transfers or needing strong collateral backing from BTC, Plasma offers a compelling infrastructure foundation.

Get Started with Plasma Blockchain: Key Steps & Considerations

Smart contract migration: assess if existing contracts can port with minimal changes.
Gas token planning: decide whether to use USDT, separate gas tokens, or hybrid models.
Security & audit: focus on bridge logic, reentrancy, oracle risks.
Liquidity onboarding & market making: bootstrap stablecoin liquidity, incentives.
Regulation & compliance: stablecoin issuance may attract legal scrutiny.
Deploy MVP & scale: iterate fast, measure gas, slippage, UX, security.