Understanding Liquidity Pool Mechanics and Exploring Implications Post Bitcoin Halving

DeFi Singapore
3 min readMay 14, 2024
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1. Introduction
In recent times, my exploration into Liquidity Pool (LP) mechanics has led me to draw interesting parallels between individual currency exchanges, such as those in The Arcade in Singapore (aka money exchanger lane), which establish their own spreads and fees, and the dynamics post Bitcoin halving.

This article delves into the interplay between miners’ behaviours, exchange strategies, and the broader cryptocurrency market landscape.

2. Post Bitcoin Halving Dynamics
The Bitcoin reward halving event prompts miners to reconsider their participation due to higher costs and diminished returns. This parallels the scenario where individuals facing escalating costs opt to spend their currency elsewhere, necessitating currency exchanges. For instance, Singaporeans grappling with reduced purchasing power might choose to transact in neighbouring Malaysia and exchange SGD to MYR. This dynamic mirrors the supply-demand dynamics seen in liquidity pools.

3. Liquidity Pool Mechanics
Exchanges strategically manage their liquidity pools, aiming to maintain favourable rates for specific currency pairs. Rather than expanding their pool of native currencies, exchanges prefer augmenting
the currencies paired with their native currency, ensuring a balanced and healthy LP. This is akin to how BTC/ETH rates can be more advantageous when swapped via smart contracts on the Ethereum network than directly on the Bitcoin network.

4. Anticipated Shifts in the Crypto LandscapeIn the foreseeable future, we anticipate notable movements of BTC to alternative networks,
influencing supply-demand dynamics across various popular cryptocurrency pairs:
- BTC/ETH: Bitcoin for Ether
- BTC/DOGE: Bitcoin for Dogecoin
- BTC/LTC: Bitcoin for Litecoin
- BTC/ADA: Bitcoin for Cardano
- BTC/XLM: Bitcoin for Stellar Lumens

5. Implications
Such shifts are poised to impact BTC prices inversely proportional to the increase in supply or decrease in demand. Consequently, currencies paired with BTC may experience contrasting price movements.

6. Closing Thoughts
Understanding liquidity pool mechanics and anticipating market shifts post Bitcoin halving are crucial for stakeholders navigating the cryptocurrency landscape, especially to have calculated risk in price
movements. By comprehending these dynamics, investors can make better investment decisions tailored to their risk preferences. As an investor who prefers lesser risks, I would choose to stake in the opposite pair of BTC to earn interest and capital appreciation in the long term.

This strategic approach aligns with mitigating risks while capitalising on market opportunities, fostering a balanced and sustainable investment strategy in the evolving crypto ecosystem.

written by Edmund Tay
Web 3 enthuasist
Adjunct Writer — DEFI Singapore

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, or employer.

The information provided in this article is for informational purposes only. It does not constitute financial advice, investment recommendations, or endorsements of specific cryptocurrencies or investment strategies.

Cryptocurrency markets are highly volatile and speculative, and investing in them involves inherent risks, including the risk of loss of capital. Readers are encouraged to conduct their research and consult with financial advisors before making investment decisions.

The author and Defi Singapore disclaim any liability for financial losses incurred based on the information presented in this article.

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DeFi Singapore

To promote financial literacy & awareness of benefits & risks of crypto assets, & advocate practical technical analysis education for consumers.