Decentralized Liquidity Is the Backbone of DeFi

Decentralized payments are just one piece of the puzzle of what it really means to be decentralized, as you'll also need the assistance of decentralized liquidity to build and extend additional functional financial layers on top of your blockchain-related protocol/application.

Liquidity is king, and it can make or break your protocol if you cannot rally sufficient liquidity to aid in your project's growth and enable the use cases you sought out to provide your end-users.

The existence of decentralized liquidity pools provides added reassurance to large investors in young projects who do not want to get stuck trying to unload their tokens in an illiquid market.

Liquidity pools are thus a bellwether of maturation for decentralized cryptocurrency markets.

The total quantity of liquidity in these decentralized pools remains small by the standards of conventional markets, but it is growing at a fairly impressive pace.

The biggest problem faced by liquidity suppliers to pools like Uniswap is the risk of major relative price movements between the paired assets; if the price of an asset in a trading pair surged suddenly, it could cause a ripple effect of negative counter-trades from a lack of proper liquidity.

Would-be liquidity providers in new markets will have a bit less to fear when they can use relatively stable assets as their base pair, insuring against collapses in the liquidity of their target market.

The inability of the main Ethereum chain to rapidly settle high volumes of transactions is a fundamental impediment to liquidity providers, because the ability to quickly remove liquidity is a driver of willingness to provide liquidity in the first place.

Plenty of parties have tried to "Shortcut" the liquidity problem by providing liquidity from some concentrated or centralized venue.

Therefore the health of DeFi is largely identical to the health of decentralized liquidity venues.