Why Locking Liquidity is Important for Cryptocurrency

June 18th 2021 2,699 reads

@mudramanagerMudra Manager

Mudra is a BSC DeFi Asset Manager

Let us start with understanding what liquidity means for cryptocurrency and why you may want to lock it.

Liquidity, simply put, is a pool of funds that crypto token developers need to create to enable their investors to buy and sell instantly. Without this pool, the investors will have to wait for someone to match their buy or sell order and there is no guarantee that the trade will be completed at all.

Liquidity is created by pooling in the new token along with another token of established value (e.g., ETH or BNB or stablecoin like Tether) in an exchange like Uniswap or PancakeSwap. This pool of funds gets deposited in the exchange and liquidity provider receives liquidity pool (LP) tokens in return, which can be used at a later point to withdraw the pool funds.

Why should liquidity be locked?

If liquidity is unlocked, then the token developers can do what is infamously known as "rugpull".

Once investors start buying token from the exchange, the liquidity pool will accumulate more and more coins of established value (e.g., ETH or BNB or Tether).

This is because investors are basically sending these tokens of value to the exchange, to get the new token. Developers can withdraw this liquidity from the exchange, cash in all the value and run off with it.

Liquidity is locked by renouncing the ownership of liquidity pool (LP) tokens for a fixed time period, by sending them to a time-lock smart contract. Without ownership of LP tokens, developers cannot get liquidity pool funds back.

This provides confidence to the investors that the token developers will not run away with the liquidity money. It is now a standard practice that all token developers follow, and this is what really differentiates a scam coin from a real one.

What to keep in mind while locking liquidity

Alright, so locking liquidity is important, we get it. But as a developer, how do we go about it? Let us talk about some of the questions you might have on your mind:

1. How long should I lock my liquidity pool tokens for?
To provide the necessary confidence to the investors, a minimum of one year and ideally a three or five-year lock period is recommended. This would also allow ample time for your coin to grow to a scale where investors will pool in liquidity, and nobody would be really worried about a rug pull by the owners.

2. How much liquidity I should lock?
Liquidity is the first thing that your investors check for and anything which stands out might make them uncomfortable. Ideally, you should lock all your liquidity, and at minimum 80%. Otherwise, many token scan tools like Mudra Research and poocoin will start flagging your token.

3. Will locking liquidity hamper trading of my token?
Not at all, you are locking your liquidity tokens and not your original tokens. Investors can freely exchange your token and even more so with confidence.

4. How do I lock liquidity?
Liquidity is locked in a time-lock smart contract. Some token owners deploy their own time-lock contract, however since it is a custom contract, this practice is not well trusted. The ideal way is to use a reputed third-party locker. There are quite a few, however, Mudra Locker from Mudra Manager offers the best way to lock liquidity.

5. How is Mudra Locker different?
Mudra locker is a trusted and secure platform for locking liquidity for BSC cryptocurrency. At the time of publishing, more than 250 projects have locked their Liquidity Pool (LP) tokens with Mudra locker. It is also the most affordable platform with absolutely minimum fees.

It has no hidden agenda, like promoting a utility token and forcing users to buy it. Finally, it offers the best UI and features of all the platforms. It is easy to use, you can lock liquidity, withdraw on lock completion, add more tokens to the lock, transfer ownership, extend the lock duration, all in a matter of seconds. And the cherry on top, you can create shareable lock certificates with QR code that you can share with your investors, flaunt on your website and social media.

To know more visit Mudra Locker

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