<figure class="wp-block-image size-large"><img width="325px" height="183px" srcSet="https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/09/13013444/Why-liquidity-is-so-important-375x211.webp 375w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/09/13013444/Why-liquidity-is-so-important-662x372.webp 662w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/09/13013444/Why-liquidity-is-so-important-768x432.webp 768w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/09/13013444/Why-liquidity-is-so-important.webp 688w" sizes="(max-width: 425px) 150px, 450px" src="https://ll-blog-dev.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2023/09/13013444/Why-liquidity-is-so-important.webp" alt="Why liquidity is so important" class="wp-image-3960"/></figure>



You can’t just collateralize every token.



Liquid Loans chose to collateralize PLS because it is the native token of <a rel="noreferrer noopener" href="https://www.thecoinzone.com/pulsechain/pulsechain-official-guide" data-type="URL" data-id="https://www.thecoinzone.com/pulsechain/pulsechain-official-guide" target="_blank">PulseChain</a> and will have the most liquidity.



Continue on to learn why thick liquidity pools for PLS help <a href="https://www.thecoinzone.com/liquidloans/usdl-crypto" data-type="URL" data-id="https://www.thecoinzone.com/liquidloans/usdl-crypto" target="_blank" rel="noreferrer noopener">USDL</a>.



<h2 class="wp-block-heading tablecontent">The Problem of Illiquid Collateral</h2>



Imagine there are 1,000,000 PLS tokens in circulation and there is one <a href="https://www.thecoinzone.com/defi/liquidity-pools" data-type="URL" data-id="https://www.thecoinzone.com/defi/liquidity-pools" target="_blank" rel="noreferrer noopener">liquidity pool</a> set up for 1 PLS to 1 USDC. This sets PLS at a price of $1.



Therefore, in theory, you could take 999,999 PLS and collateralize them for 909,090 USDL.



However, there is a problem here. The collateral backing USDL is highly illiquid and cannot be exchanged for much.



If you redeem all of the USDL for PLS and try to <a href="https://www.thecoinzone.com/wealth-building/buy-the-rumor-sell-the-news/" data-wpil-monitor-id="572">sell it on the market</a>, you will only be able to extract 1 USDC for 909,090 USDL.



“Illiquid Collateral is Bad Collateral” - <a href="https://x.com/WaLLrusOfficial" data-type="URL" data-id="https://twitter.com/WaLLrusOfficial" target="_blank" rel="noreferrer noopener">WaLLrus</a>



Also, consider this example.



If you were to lend a friend 500,000 USD, would you want them to collateralize a Pokemon card worth 550,000 USD or 550,000 USD worth of gold.



If you were wise, you would prefer gold because almost everybody around the world recognizes gold as valuable.



Whereas with the Pokemon card, you have to go and work hard to find a buyer and you might be unsucesssful. 



<h2 class="wp-block-heading tablecontent">Why We Want Thick PLS Liquidity Pools</h2>



Thick PLS liquidity pools (i.e. PLS/PLSX, PLS/USDC,USDT,DAI,CST, USDL, etc) support the health of USDL for two reasons:



<ol>
<li>Decreased Price Volatility. </li>
</ol>



The less value in a <a href="https://www.thecoinzone.com/defi/stablecoin-liquidity-pools" data-type="URL" data-id="https://www.thecoinzone.com/defi/stablecoin-liquidity-pools" target="_blank" rel="noreferrer noopener">liquidity pool</a>, the easier it is to move the price with a single order and vice versa. Therefore, if there is more value in the PLS pairs, the price will move less. This will support the overall collateral health of the <a href="https://www.thecoinzone.com/defi/defi-yield-protocol/" data-wpil-monitor-id="273">Liquid Loans protocol</a> and USDL.



<ol start="2">
<li>Redemption Value.</li>
</ol>



The fundamental reason why <a href="https://www.thecoinzone.com/liquidloans/usdl-is-actually-a-store-of-value-but-only-if-you-mint-it-yourself/" data-wpil-monitor-id="1270">USDL has value</a> is because it is redeemable for $1 worth of PLS. But, if PLS itself is not redeemable for $1 worth of another asset, then neither is USDL. For example, if I can redeem 1 USDL for $1 worth of PLS, then I need to be able to swap $1 worth of PLS for $1 worth of PLSX or eUSDC.



<h2 class="wp-block-heading tablecontent">Why You Can’t Collateralize Every Asset</h2>



You can’t collateralize every asset because they simply don’t have enough liquidity. 



If you want to create the most robust stablecoin on a blockchain, then you have to choose the collateral that has the most <a href="https://www.thecoinzone.com/defi/lp-tokens" data-type="URL" data-id="https://www.thecoinzone.com/defi/lp-tokens" target="_blank" rel="noreferrer noopener">LP</a> pairs across the chain.



In the case of PulseChain, this asset is <a href="https://www.thecoinzone.com/pulsechain/how-to-buy-pls-step-by-step-guide" data-type="URL" data-id="https://www.thecoinzone.com/pulsechain/how-to-buy-pls-step-by-step-guide" target="_blank" rel="noreferrer noopener">PLS</a>, the native coin to the chain.



<h2 class="wp-block-heading tablecontent">How Liquid Loans is Incentivizing LP on PLS</h2>



During the first 42 days after the launch of Liquid Loans, there will be an <a href="https://www.thecoinzone.com/liquidloans/lp-rewards" data-type="URL" data-id="https://www.thecoinzone.com/liquidloans/lp-rewards" target="_blank" rel="noreferrer noopener">LP Rewards program</a>.



In this program, holders of PLS and USDL will have the opportunity to provide LP on PulseX v2. 



As a reward, they can take their LP tokens to the Liquid Loans dApp and stake them to earn <a href="https://www.thecoinzone.com/pulsechain/loan-token-ultimate-guide" data-type="URL" data-id="https://www.thecoinzone.com/pulsechain/loan-token-ultimate-guide" target="_blank" rel="noreferrer noopener">LOAN</a> token emissions.

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Why Thick PLS Liquidity Pools Help USDL (and Why You Can't Collateralize Every Token)

USDL gains its strength from being collateralized by a highly liquid asset. Read on to learn why this is the case.

Why Thick PLS <a href="https://www.thecoinzone.com/liquidloans/liquid-loans-analytics-summary/" data-wpil-monitor-id="1465">Liquidity Pools</a> Help USDL (and Why You Can't Collateralize Every Token)