What is a Liquidity Pool in Decentralized Finance (DeFi)?

CecilDavis

New member
I'm exploring DeFi and came across the concept of liquidity pools. Can someone explain what they are and how they function?
 
Liquidity pools are essential components of decentralized finance (DeFi) platforms, particularly in decentralized exchanges (DEXs). They are collections of funds locked in a smart contract that provide liquidity for trading pairs on DEXs. Users, often called liquidity providers, deposit an equal value of two tokens in a pool to facilitate trading and earn transaction fees generated from the trades conducted through the pool. This mechanism allows for automated and permissionless trading without the need for traditional market makers or order books. Liquidity pools help solve the issue of liquidity in decentralized markets, making them more efficient and accessible. For a deeper understanding of how liquidity pools work, their benefits, and associated risks, this article provides comprehensive insights: https://paybis.com/blog/glossary/liquidity-pool/ It explores the mechanics behind liquidity pools, how they contribute to the DeFi ecosystem, and what potential investors need to consider.
 
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