Liquidity pool

A liquidity pool is a pool of assets, usually tokens, that are locked and used to facilitate trades on a decentralized exchange. It is designed to create liquidity in a market where buyers and sellers can trade tokens without the need for a centralized intermediary. In a liquidity pool, traders deposit cryptocurrencies into a smart contract, and that contract acts as a market maker. The smart contract algorithmically calculates the exchange rate between the two tokens in the pool, ensuring a fair price. Traders can then trade tokens in the pool and benefit from instant liquidity without waiting for other traders to join the market. Liquidity pools play a vital role in decentralized finance (DeFi), as they allow for faster and more efficient trading with lower fees than traditional exchanges. They also help keep prices stable by providing a continuous supply of buyers and sellers. Without liquidity pools, DeFi would not be able to function effectively, and token trading would be more challenging.