Liquidity Pool
A liquidity pool is a collection of funds locked into a smart contract within a decentralized exchange (DEX) or other DeFi platform, used to facilitate trading by providing liquidity. In liquidity pools, users (liquidity providers) contribute equal values of two different assets (e.g., ETH and USDT), which are used to enable decentralized trading without relying on traditional order books. In return, liquidity providers earn fees based on the trades that take place using the pool.
Example
An investor deposits an equal amount of Ethereum (ETH) and Tether (USDT) into a liquidity pool on a decentralized exchange to facilitate trading and earns a portion of the trading fees as a reward.
Key points
• A collection of funds used to facilitate decentralized trading on platforms like DEXs.
• Liquidity providers contribute assets and earn fees from trades in the pool.
• Common in DeFi, enabling trading without traditional market makers or order books.
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