A liquidity pool is a vital piece of the ecosystem of an asset. This is a solution which provides exchanges, wallets and other 2c oriented trading businesses with liquidity and order execution.
If we imagine a new exchange, where there are several customers and they want to trade for some asset, let's say BTC for USDT. When they push the "buy" button, their order is placed into an order book. The trade requires a counterparty to execute this order. This usually takes place on fully-fledged exchanges where there is another party who wants to sell USDT for BTC, but our new imaginary exchange is small, and the market is tiny. Meaning less options for making a profit.
At this point, they have a few options: Find / order market makers
- This has a cost, of course. Market makers don't like smaller exchanges because there is not a large enough trade volume to make a profit from. Do nothing and concentrate on marketing
- without market makers and a proper order book, it looks like wasting money. Nobody wants to pay higher fees. Use a liquidity provider such as Black Ocean
– Full integration requires additional integration via API, but for an exchange, it would be a small amount of work.
The exchange can make additional income. Black Ocean
pays 0.005% - 0.01% for each order, which is funded by exchanges. It means that an exchange can offer zero fees to customers, and it continues to make money, but usually exchanges charge a fee. This means that an exchange can generate money in two ways – fees from customers and the reward from the liquidity pool. Comparing market makers, an exchange should pay him around 0.005% to 0.015% for the same service.