Diversification reduce reliance on any single market, ensuring stability during downturns. Here are the top 5 ways to diversify your portfolio.

Imagine watching the market crash while your portfolio stays steady — not because you predicted the dip, but because you built a strong defense against it. 

 is a time-tested financial safeguard in unpredictable markets. By balancing various assets, such as crypto, commodities, 

 and international stocks, investors can weather 

 and seize opportunities. So, how do you diversify effectively without overcomplicating things? This article explores the top expert strategies, and some common pitfalls to avoid.

 strategy that spreads investments across different asset classes, sectors or countries to reduce exposure to any single asset or risk. This approach aims to stabilize returns by cushioning the impact of market volatility on your overall portfolio.

Why is portfolio diversification important?

The age-old advice not to “put all your eggs in one basket” holds true when it comes to investing, and it’s a simple but powerful way to protect your wealth. Diversification helps safeguard your capital by spreading your investments across different assets so that when one underperforms, others may help offset the loss. This strategy is especially important for people nearing retirement, or for anyone who values financial stability.

By investing across various asset classes — such as stocks, bonds and real estate, as well as different industries and geographic regions — you build a portfolio that’s more resilient to economic ups and downs. But beyond just reducing risk, diversification often leads to better risk-adjusted returns and less day-to-day volatility, for an investment experience that’s less stressful overall. Moreover, because not all investments will dip at the same time, investors don’t continually have to monitor everything in their portfolios.

Diversification can also help guard against inflation, thanks to assets that tend to perform well when prices rise. At the same time, it opens the door to opportunities in growing markets, all while keeping your investment approach balanced and aligned with your long-term financial goals.

Top 5 tips for diversifying your portfolio

Here are five smart ways to diversify your investments and protect your future returns.

Tip 1: Spread investments across asset classes

Spreading your investments across different asset classes, such as stocks, bonds, real estate, cryptocurrencies and commodities, helps ensure your portfolio isn’t overly exposed to the risks of any single market segment. This makes your investments more resilient. Different assets often react differently to market conditions, so when one asset underperforms, others may perform better, balancing your overall returns (as well as your risks).

Assuming you invest solely in stocks, and the stock market declines, your entire portfolio may suffer. However, if you also hold bonds, which often perform well when stocks decline, any blow to your portfolio can be softened.​

Don’t just buy one type of stock or bond. Within each asset class, invest in a mix of sectors (such as technology, healthcare and energy), company sizes (large-cap, mid-cap and small-cap) and styles (growth, value and dividend). This approach further reduces the risk that poor performance in one area or industry will drag down your entire portfolio.

If you invest heavily in the technology sector and it experiences a downturn, your portfolio could suffer accordingly. Diversifying into other sectors like healthcare or consumer goods can help balance your investments’ performance.​

Tip 3: Low-cost index funds and ETFs for instant diversification

 (ETFs) offer a ready-made way to achieve diversification. They provide exposure to a broad range of assets or sectors, often at a lower cost than actively managed funds. This approach simplifies diversification, and can be more accessible for individual investors, especially beginners. It's an efficient way to diversify quickly and easily, as each fund typically holds dozens or even hundreds of underlying securities.

For instance, investing in an S&P 500 index fund gives you exposure to 500 large US companies, providing instant diversification across various industries.​

​Expanding your portfolio to include international assets can enhance diversification and provide exposure to growth opportunities beyond your home country. Investing globally can help mitigate risks associated with domestic economic downturns, as different regions may experience varying economic cycles.​

 their US counterparts in the first quarter of 2025. This outperformance was attributed to strong corporate earnings, increased defense and infrastructure spending in Europe, and the absence of direct US tariffs targeting European goods. Despite initial skepticism, European stocks rose by 10–12%, even as US markets declined somewhat, thus helping to stabilize global portfolio returns for investors with international diversification

However, investors must be mindful of currency exchange risks. Fluctuations in exchange rates can impact the value of international investments. For instance, if you invest in a European company and the euro depreciates against the US dollar, the value of your investment in dollar terms may decrease even if the company's performance remains strong.

Diversification isn’t a one-time task. Over time, some investments may grow faster than others, skewing your original allocation. Regularly reviewing and rebalancing your portfolio ensures it stays aligned with your 

 and investment goals, maintaining the benefits of diversification while improving long-term performance.

Let’s say your target allocation is 60% stocks and 40% bonds, but stocks perform well and grow to 70% of your portfolio. In this case, rebalancing would involve selling some stocks and buying bonds to return to your original allocation.​

Common portfolio diversification mistakes to avoid

Avoiding these common diversification mistakes can help you build a stronger, more resilient portfolio:

How to diversify your portfolio with Bybit

Bybit is a leading crypto exchange that offers a wide range of products designed to help you diversify across cryptocurrencies, traditional assets and innovative financial instruments. Following are some of the many products and services that Bybit offers.

Portfolio diversification is a key strategy for reducing risk by spreading investments across different asset classes, sectors and regions. Achieving this goal, however, requires a balanced and disciplined approach to ensure resilience and long-term growth. Bybit helps simplify this process with powerful tools like MT5 trading, Copy Trading and Structured Products. These tools allow investors to diversify their portfolios more effectively, providing access to diverse markets and strategies while also minimizing risk. 

Beginner

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Top 5 tips to diversify your portfolio

Obol Collective (OBOL) enhances Ethereum staking with distributed validators, reducing risk, slashing penalties, and entry barriers for smaller stakers.

The Ethereum blockchain has crashed!" — This is a news piece that has never been reported and will, hopefully, never see the light of day. Although several other blockchain networks have experienced significant outages or total breakdowns, a network failure of any appreciable proportions has never occurred in the history of 

 (ETH). A large part of the blockchain's stellar security record is due to its global and well-decentralized network of validator 

However, despite boasting excellent decentralization properties, Ethereum does have areas to improve upon in its validation and 

 mechanisms. First, running a full validator node on the network is financially prohibitive for smaller individuals and entities, as the blockchain requires a stake of 32 ETH (around $84,500 as of May 14, 2025) per each full validator. Secondly, there’s always a risk of individual validators, even the largest ones, being hacked. Finally, technical failures may lead to slashing penalties for validators, and too many instances of such slashing can undermine trust in the blockchain’s security model.

Obol Collective (OBOL) is a decentralized platform based on 

 (DVT), which aims to solve the vulnerabilities of Ethereum validation and staking. Leveraging DVT, Obol lets multiple nodes run as a single validator, splitting both the processing load and slashing risks. By distributing responsibility across numerous participants, Obol effectively eliminates single points of failure and enhances the overall resilience of Ethereum’s staking infrastructure. Importantly, Obol’s use of DVT reduces entry barriers to Ethereum staking for smaller entities — individuals or small organizations — as they can team up and pool their resources to act as a single validator.

 (OBOL), a provider of decentralized infrastructure, enables multiple parties to jointly run Ethereum validators in a secure and fault-tolerant fashion. 

At the core of Obol’s product offering is DVT — a technology that splits all the functionalities of a single validator on a 

 (PoS) network between multiple (potentially many) individual nodes. These nodes share not only processing responsibilities, but also risks and rewards.

Obol’s infrastructure project is most typically used by 

 (RPL), to support their operations. While these protocols handle user funds and front-end functionality, Obol provides its DVT-based validator set to help support their Ethereum-based liquid staking.

Obol offers numerous benefits to liquid staking protocols and validator entities. It creates access to Ethereum staking for smaller, aspiring validators. Such entities often struggle with the financial requirement of staking no fewer than 32 ETH to run a validator. By joining an Obol cluster, which lets multiple nodes act as a single validator, these smaller players can participate in Ethereum staking by splitting the 32 ETH requirement between them.

Additionally, Obol’s DVT-based node splitting for validators provides better protection against the risk of slashing, which results in financial penalties or even suspension for the offending node. Slashing occurs on Ethereum and other PoS chains when a validator fails to fulfill their responsibilities on the network. It may happen due to willful misbehavior, or it could often be the result of honest mistakes or misconfigurations. For instance, a failed internet connection may keep a validator node offline for too long, resulting in slashing. Thanks to Obol's DVT, the other nodes can still keep the cluster functioning if one node fails.

The Obol project was conceptualized and developed by Obol Labs, an Illinois (US)–based company founded in 2021 by Oisín Kyne and Collin Myers, and the platform is supported by the nonprofit Obol Association. The first distributed validator on Ethereum was launched by the project in late 2022. As of this writing in May 2025, Obol Collective has established itself as the largest provider of DVT services in the blockchain industry.

Using Obol, developers and operators can create distributed validator (DV) clusters, each one acting as a single full validator on Ethereum. There are two options for creating clusters within Obol Collective: 

When one operator creates a cluster, they can assign multiple nodes to it, creating a distributed setup that avoids a single point of failure. It's recommended that the cluster nodes be hosted on different machines, although it's also permissible to use a single machine for all of the nodes. Using one machine for all cluster nodes creates a significant vulnerability, due to centralization of resources.

To automate and manage proper splitting of validator rewards and staking allocations, Obol uses a set of 

. These are noncustodial and normally immutable, meaning that the share allocations rewarded to nodes within a DV cannot be changed after the cluster’s deployment. However, one specific type of Splits contract, a 

 splitter contract, does have the functionality to update split percentages at a post-deployment stage. 

Obol Splits technology has been integrated into some of the leading liquid staking and restaking protocols — Lido and 

 (EIGEN) — to help DV operators service these platforms.

Charon is middleware developed by Obol to allow any Ethereum validator to operate as part of a DV. It acts as the main layer, allowing the platform to offer DVT-based services. Using Charon, operators can create a Byzantine fault tolerant (BFT) cluster and coordinate their work on the network as a single entity. Byzantine fault tolerance allows Obol clusters to operate and process Ethereum blocks even if some of the nodes within the cluster behave maliciously, or fail due to technical issues.

Obol also offers a staking-as-a-service (StaaS) product that lets users access staking opportunities without having to run the actual node hardware, further reducing barriers to end users for entry to Ethereum staking.

Obol’s DV Launchpad lets users configure and launch their clusters. Step by step, the launchpad walks users through all of the procedures required to create their own DV together with their peers. For less technically minded users, the launchpad is an ideal way to set up clusters using its graphical interface.

The platform's native token, OBOL, is an 

 asset issued on the Ethereum blockchain. OBOL was launched in January 2025, more than two years after Obol began offering its DV services. Upon launch, OBOL tokens remained locked, i.e., non-transferable. On May 7, 2025, this restriction was removed, making OBOL publicly available and freely tradable. Due to the lockup period, many online sources report May 7 as the token's actual launch date.

The OBOL token has several key functions on Obol Collective. One of these is 

, as OBOL token holders can delegate their voting power to designated delegates who participate in votes in the Token House, a governance platform where proposals regarding Obol Collective's direction and rules are introduced, considered and voted on.

Delegates also vote on funding allocations to support ecosystem growth under Obol’s Retroactive Funding (RAF) program. As such, OBOL holders may participate in funding decisions through their chosen delegates.

Another utility function of the token is that of staking. You can earn OBOL rewards through OBOL Incentives, a community incentives program that lets you stake your ETH on DVs. In 2025, 12.5 million OBOL are being distributed as staking rewards under this program.

The OBOL token may also be used for various DeFi use cases, e.g., within lending protocols and restaking platforms, as well as for increasing liquidity on DeFi protocols by contributing to their liquidity pools.

OBOL's total and maximum supply is 500 million, with just over 98.7 million tokens in circulation. Of the total supply amount, 7.5% was distributed via a retroactive 

 that rewarded certain ecosystem community members, such as developers and users who contributed to testnet and Alpha and Beta Mainnet operations.

The chart below shows the allocation shares of the token’s total supply.

The OBOL token is available on Bybit both as a 

. You can also take advantage of the Bybit event dedicated to the OBOL token to grab a share of the 

To join the event, deposit or trade OBOL on Bybit's Spot market, and stake between 200 and 1,000 OBOL using Bybit’s 15-day Fixed Savings plan to earn a 25% APR. Also, VIP users can enjoy staking limits of 2,000 OBOL and an exclusive 50% APR, while new users can access up to 200% APR via a booster voucher. The event is valid till Jun 7, 2025, 12PM UTC.

As of May 14, 2025, the OBOL token has been on the market only for a week. It’s currently trading at $0.2347, 38.3% lower than its ATH of $0.3801 on May 7, 2025, and 2.1% higher than its ATL of $0.2298, registered on May 13, 2025.

Long-term price forecasts for OBOL are mostly bullish. DigitalCoinPrice 

 of $0.79 in 2027 and $1.17 in 2030, while CoinCodex 

 at around $ 0.25 in 2027 and rise to $0.86 in 2030.

Given the token's minimal market history, future price determination for OBOL is a tentative exercise at the moment. Various market forces and industry developments can influence the token's price in the future, so always conduct your 

 before deciding to invest in OBOL or any other crypto token.

As the leading provider of a decentralized operator ecosystem, Obol stands out as one of the most essential decentralized infrastructure networks in the Ethereum ecosystem, offering a truly next-gen staking and validation system and contributing to better blockchain security. Obol's DVT-based model offers slashing-resistant nodes, and helps further decentralize Ethereum’s validator system.

Distributed validators are crucial not just for decentralization, but also for better performance and security. Unlike traditional validators, they democratize access to Ethereum staking by supporting restaking-based finance applications and smaller players in the niche. Among Layer 1 blockchains, Ethereum features some of the most onerous financial requirements in order to run a full validator node. Obol Collective solves this problem using its DV model, a true innovation within the world of Ethereum.

Advanced

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Obol Collective (OBOL): Coordinating trust through collective staking

This article explores Lorenzo Protocol, how its core technology works, the utility of its native BANK token and how you can trade it on Bybit.

Bitcoin, the world’s most successful original cryptocurrency, holds the largest crypto market capitalization. However, much of its vast liquidity remains separate from the diverse yield opportunities in 

. Lorenzo Protocol is designed to bridge this gap, aiming to transform BTC from a passive store of value into a productive, yield-generating asset for both institutional and retail users.

This article explores Lorenzo Protocol, its recent evolution into an institutional-grade asset management platform, how its core technology works, the utility of its native BANK token and how you can trade it on Bybit.

 is a decentralized asset management platform that’s building an institutional-grade financial layer for Bitcoin, aiming to unlock its vast liquidity for the DeFi ecosystem. Initially focused on helping BTC holders access yield through 

 its infrastructure with the introduction of its Financial Abstraction Layer. This strategic shift positions Lorenzo Protocol as an on-chain asset management platform that’s dedicated to tokenizing financial products and delivering sustainable, real yield.

The protocol's core mission is to advance a borderless global economy by enabling Bitcoin holders and other capital providers to earn yield without sacrificing their assets’ liquidity. It seeks to connect idle capital with diverse yield strategies, including staking and sophisticated trading opportunities, making these opportunities accessible through standardized, tokenized financial products.

Who are Lorenzo Protocol's founders and investors?

Lorenzo Protocol was co-founded by a team with strong backgrounds in finance and technology. Co-founders Matt Ye, Fan Sang and Toby Yu serve (respectively) as CEO, CTO and CFO. Their collective expertise guides the protocol's development and strategic vision.

The project has garnered support from a range of prominent investors. Key backers include YZi Labs, BNB Chain, Geekcartel, NGC Ventures, HTX Ventures, ArkStream Capital, Animoca Brands and Sats Ventures. As of May 12, 2025, Lorenzo Protocol has a DeFi 

Two core components power Lorenzo Protocol’s mission to bring institutional-grade financial products on-chain: the 

The Financial Abstraction Layer is Lorenzo's core infrastructure. It tokenizes centralized finance (CeFi) strategies and makes them usable within DeFi. The FAL packages complex operations, such as custody, lending and trading, into simple, tokenized products accessible via standardized vaults and modular APIs. This allows financial access platforms (like neobanks or PayFi apps) to integrate verifiable yield modules without building complex financial logic themselves. 

An example of a product powered by FAL is the On-Chain Traded Fund (OTF), which tokenizes yield strategies (fixed yield, principal protection, etc.) into a single tradable ticker, similar to traditional 

The Bitcoin Liquidity Layer specifically focuses on integrating BTC into DeFi. Recognizing that a vast amount of Bitcoin sits idle, this layer provides infrastructure for issuing various BTC-native derivative tokens. These include stBTC, a liquid staking token representing Bitcoin staked via 

 (WBTC) standard designed for seamless use across Lorenzo's ecosystem and DeFi. This layer aims to turn passive BTC into active capital for 

BANK is the native governance and utility token of the Lorenzo Protocol. It plays a crucial role in the ecosystem's operation and long-term alignment. The key use cases of BANK include:

As of May 12, 2025, according to CoinGecko data, 

The initial circulating supply was 20.25% of the total, with 8% of the total supply reserved for an initial community 

. BANK’s token unlock schedule is designed for long-term alignment, with no token unlocks for the team, investors, advisors or treasury in the first year post-

Bybit has recently expanded its offerings on its user-friendly and intuitive cryptocurrency exchange by 

. This allows traders to gain exposure to BANK's price movements with leverage.

The BANKUSDT Perpetual contract is featured in Bybit's Innovation Zone, which provides access to new and innovative token pairs. Users can trade this contract with up to 50x leverage.

You can trade the BANKUSDT Perpetual contract on Bybit once you have a verified account with deposited funds. Here's how to get started, in four simple steps:

Intermediate

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Lorenzo Protocol (BANK): Unlocking institutional Bitcoin liquidity and yield

In this article, we’ll dive into the Pundi X ecosystem and learn how each product works, examine the PUNDIX token and share how to trade PUNDIX on Bybit.

Pundi X, founded in 2017 by Zac Cheah and Pitt Huang, is a blockchain-based payment solution designed to simplify cryptocurrency transactions, making them as seamless as traditional retail payments.

With an ecosystem of tools like the XPOS point-of-sale device, XWallet mobile app and XPASS virtual card, Pundi X aims to bridge the gap between the digital and physical.

Pundi X is a blockchain-based payment solution aimed at making cryptocurrency transactions as straightforward as traditional retail payments. Founded in 2017, it bridges the gap between digital assets and retail, enabling consumers to buy, sell and spend crypto in physical stores.

The project initially launched with the NPXS token in 2018, later rebranding to PUNDIX in 2021 via a 1000:1 token swap intended to reduce supply and strengthen its brand identity.

Pundi X was co-founded in 2017 by Zac Cheah and Pitt Huang.

The project is backed by a mix of institutional investors and blockchain pioneers, supporting its mission to make crypto payments mainstream.

The Pundi X ecosystem is designed to make crypto transactions as seamless as traditional payments, bridging the gap between blockchain and retail. 

Pundi X Chain is a multichain blockchain network designed for high-speed, low-cost retail transactions. It’s optimized to support the Pundi X ecosystem, including XPOS, XWallet and XPASS, providing a scalable infrastructure for global merchants looking to integrate blockchain technology.

PUNDIX is the native utility token of the Pundi X ecosystem. It supports transactions, rewards and network security. Initially launched as NPXS in 2018, it rebranded to PUNDIX in 2021 with a 1000:1 token swap.

PUNDIX is available for trading on multiple leading exchanges, including Bybit, which recently listed the PUNDIX/USDT Perpetual contract with up to 25x leverage. This listing provides traders with enhanced flexibility for leveraged trading.

Trading PUNDIX on Bybit is straightforward. Simply use the following step-by-step guide:

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Pundi X (PUNDIX): AI-powered web3 payment ecosystem

DeFi

Automated market makers (AMM)s are a key feature of decentralized exchanges (DEXes). Read all about them here.

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Cryptocurrencies have utilized the concept of decentralization for a variety of different services. A widely used service within cryptocurrencies is decentralized finance (

) and is increasingly seen as an alternative to traditional, or centralized financial services (CeFi).

, price negotiation among users may not be the cheapest and most efficient since constant updates are needed, leading to low liquidity. To solve this issue, a new exchanging protocol known as Automated Market Maker (AMM) has emerged. In this article, we are going to dive into the AMM and how it works. To understand the fundamentals of AMM, you first need to know what decentralized exchanges and market makers are.

(DEX) is one which requires no third parties to regulate transactions. These types of exchanges offer various functions that are similar to traditional exchanges, such as order books, matching systems, or security functions. Usually, decentralized exchanges are developed and launched as decentralized applications (

Each DEX is regulated through smart contracts. Smart contracts are sets of codes that are used to run a service, without requiring a central authority. So what are the main distinguishing features that the lack of a central authority brings to exchanges?

When it comes to similarities, both a decentralized exchange (DEX) and centralized exchange (CEX) offer cryptocurrency exchanges using a trading venue and a matching system. However, there are key differences between DEX and CEX. Some of the most important are listed below.

Decentralization entails anonymity. People who use DEXs remain anonymous since they are not required to disclose personal information to the exchange. With CEXs, however, authorities can access your personal information and exchange history. For example, banks require that you provide personal documents in order to be able to exchange your assets.

With a DEX, you have full control over your assets. No entity is able to access or use your assets in any other way. Centralized exchanges have access to your assets, making it possible for them to use your money. 

When using a DEX, there is no likelihood of human error since the platform runs using smart contracts. Moreover, a DEX, practically speaking,  cannot be hacked because the hacker would need to control the majority of the network, which is technically impossible. However, it is worth noting that the smart contracts themselves are prone to error if they have a flaw in their coding. This might mean potential damages to the exchange and the people who use it since smart contracts cannot be changed once they are launched. 

Government restrictions, regulations or shutdowns can greatly affect a CEX. On the other hand, a DEX is invulnerable to such decisions. Any government decision may have virtually no direct effect on such exchanges.

Liquidity is one of the most important components of exchanging. Since CEXs require that a central authority take care of the transactions, it makes transactions much faster compared to DEXs. 

A DEX generally has slower speeds because transactions need to be verified by miners. Therefore, one of the reasons why centralized exchanges are still favored by some people is the high liquidity of the former vs. the low liquidity of the latter.

CEXs are generally very simple to understand and use. The workings of exchange are not fundamentally complicated. A DEX, on the other hand, may seem confusing at first because of its decentralization. As a result, many decentralized exchanges are working to promote more simplicity.

As the name suggests, market making involves the price making of assets. Market makers are involved in the liquidity of exchange by promoting a negotiation medium for the buyer and the seller. The seller wants to sell his assets at a specific price, while the buyer wants to buy some of the assets at a different price. Market making involves finding prices and quantities between different buyers and sellers.

Let’s take a hypothetical example. Person A wants to sell 10

 at a price of $40,000 per BTC. Person B wants to buy 6 BTC at a price of $35,000 each. A market maker pushes person A to lower the ordered price to around $37,000 while suggesting person B should increase the buying price to $37,000. These demands are registered in an order book. In this way, BTC is sold by finding a common ground between the buyer and the seller. This method of negotiation already exists with centralized exchanges. The reason for market making 

A negative outcome of market making is slippage. Slippage refers to the purchase or sale of an asset at an undesirable price. This occurs when there is very low liquidity, due to the lack of market participants wanting to trade at the desired price. 

Now that we understand the main idea of a market maker, let’s jump to a new term: automated market maker (AMM).

If market making is made possible through entities that regulate transactions and promote a negotiating environment, what about decentralized exchanges — which don’t have a central authority?

As suggested, decentralized exchanges use smart contracts to regulate each payment and service. When it comes to the purchase or sale of assets, market participants can still negotiate. However, smart contracts cannot be changed. To make sure that the seller lowers the selling price or that the buyer raises the buying price, smart contracts need to continually attempt to reach common ground. The issuance of a new smart contract every time the participants change their order can be expensive, and it may take quite a long time until the transaction is finally completed. Due to this issue, a new DEX protocol known as an automated market maker (AMM) was created. 

AMM contains a pricing algorithm, a formula that may vary from exchange to exchange. The most widely known formula is the one that Uniswap uses: x * y = k 

Using this algorithm, AMM maintains fair negotiation between two parties. In other words, AMMs are smart contracts that conduct negotiations and transactions without an order book. AMMs have managed to increase the liquidity of coins and tokens in the world of cryptocurrencies.

The x * y = k formula entails that the percentage of price changes in the negotiation process varies based on the number of tokens that you own. The more tokens you have in the equation, the less the change in price when negotiating. This means that you might not sell your asset at a much lower price than the one desired, or buy an asset at a much higher price than the one that is suitable. 

If you have fewer assets involved in the transaction, the percentage change might be a little higher, but the possibility for slippage is still lower because everything is automated.

What does AMM achieve? You do not necessarily need to find another trader in order to buy or sell assets. Therefore, you don’t need to find counterparties. When using DEXs such as Binance, trade is conducted automatically, enabling a fully peer-to-peer transaction, which is the main idea of decentralization itself.

But logically, without a counterpart, there would not be any market makers. So how does market making occur without a counterpart? This is achieved through liquidity providers (LPs). 

Liquidity pools are collections of funds that come from liquidity providers. These liquidity providers earn fees for funding these pools as an incentive to keep funding them. The funding requirements differ from exchange to exchange. For example, with 

, if the LPs deposit two token types, they deposit around 50% for each. 

The reason why LPs need to do this is that there should be an equivalent number of two token types in the pool so that the AMM formula can be valid. To put things into perspective, if the value of y is 0 in the formula x * y = k, then k = 0, which would not make sense — since it would also imply that there are no tokens for the ‘y’ variable.

Anyone can be a liquidity provider, which means that anyone can become a market maker. 0.3% of transaction fees go to the LPs, making liquidity pools a good way to earn a steady income. Liquidity pools such as Uniswap’s have equal shares for every liquidity provider. As a consequence, no matter how much you deposit in the pool, you can be rewarded at the same rate as a user who has deposited much more than you.

Liquidity pools attempt to lure more liquidity providers into funding the pool. This is done to avoid slippage, which as a result increases the volume of a cryptocurrency.

It is worth noting that DEXs in the Ethereum network requires that only 

 tokens are used to fund the liquidity pools. 

However, the tokens do not necessarily need to be authorized by Uniswap in order to deposit them in the pool. Ethereum allows people to launch their own tokens, and people can list those tokens in DEXs and liquidity pools such as Uniswap.

But would the funding in liquidity pools be balanced if you would deposit 50% in ETH and another 50% of a much smaller project? Due to the high volatility of cryptocurrencies, the ratio of the deposited tokens can change drastically, especially when such differences between the two tokens are present. This is when impermanent loss occurs. Impermanent loss in the pool means that your asset is losing value due to the sudden price fluctuations from the change in ratio. 

However, there is a reason why these are called “impermanent” losses. The change in the ratio can be temporary, and the price can return to the initial price. For this reason, you should not withdraw funds prior to the prices returning to the original price, or else you may face huge financial losses. 

Despite impermanent losses, liquidity pools such as Uniswap have still proven to be very lucrative because of the trading fees they pay to liquidity providers. Moreover, liquidity pools such as Balancer’s manage to adjust the token ratios dynamically after a certain period of time. This gives liquidity providers the space to change their depositing strategy, so that impermanent losses are avoided.

There are also stablecoins in the crypto market whose value remains more stable than that of other cryptocurrencies. Depositing such coins in the liquidity pools almost guarantees to eliminate the risk for impermanent loss. For this reason, some liquidity pools only allow the deposit of stablecoins.

To sum up, automated market makers have increased the liquidity of decentralized exchanges, as well as a new profitable money-making option for liquidity providers. Being the very core of DeFi, AMMs have become one of the most important innovations of the decentralized world. AMMs may have their drawbacks, such as impermanent losses, but the benefits that come with them are much more significant. As a topic, AMM is still a relatively new concept in both the finance and technology worlds. One thing is for certain: AMM is likely to be shaped into a better feature of DeFi in the future, which as a result can increase the liquidity and lower the fees in DEXs even more.

What Is an Automated Market Maker (AMM)?

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What Is an Automated Market Maker (AMM)?

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Compete for 2,500 USDT USDT Every Week

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