Liquidity Pool

What is Liquidity Pool?

A liquidity pool is a smart contract that contains a pool of tokens that are used to facilitate trading on a decentralized exchange (DEX). Users can add their tokens to the pool and earn fees for providing liquidity, which helps to ensure that there is sufficient liquidity for trades to take place. When a user places a trade on the DEX, the liquidity pool automatically matches the trade with another user in the pool, and the fees generated from the trade are distributed among the liquidity providers in proportion to their share of the pool. The size of the liquidity pool and the fees earned by liquidity providers can vary depending on market conditions and the popularity of the DEX. Liquidity pools have become a critical component of DeFi infrastructure, enabling users to trade cryptocurrencies without the need for a centralized intermediary.