A liquidity pool is a set of assets locked in a smart contract to facilitate decentralized operations. It is considered the skeleton of many DEXs.
The term liquidity pool refers to the most relevant technology in the DeFi ecosystems. It is a set of assets locked in a smart contract to facilitate decentralized operations. A liquidity pool is considered the skeleton of many DEXs.
It allows users to buy and sell assets quickly and efficiently without waiting for a matching buyer or seller to be found, and at the same time, provides functions such as trading or landing.
Users who fill the pools are called liquidity providers or market makers. They add to the pool an equal amount of two tokens to make a market, ensuring that there is always a buyer or seller available for a given asset. In return, they earn trading fees from the trades proportionally to their share of the total liquidity.
Liquidity pools are important to the crypto industry because they allow for the smooth and efficient trading of cryptocurrencies. It can be difficult to buy or sell assets without liquidity, leading to price volatility and making it harder for investors to enter or exit the market.
In addition, liquidity pools have the potential to greatly increase the liquidity of smaller, lesser-known assets by making it easier for investors to buy and sell them. This can help increase the crypto market's overall liquidity and make it more accessible to a wider range of investors.
The liquidity pools have become widespread thanks to Ethereum and Uniswap; among the first DEXs to use them are SushiSwap, Curve, and Balancer.