Liquidity Pool

A liquidity pool is a collection of funds locked in a smart contract, providing the necessary liquidity for decentralized trading and other DeFi activities. Instead of traditional order books where buyers and sellers are matched, liquidity pools facilitate token swaps on decentralized exchanges (DEXs) by enabling users to trade against the pooled assets. Participants who deposit their tokens into these pools are known as liquidity providers (LPs), and they typically receive a portion of the trading fees generated by the pool, incentivizing them to contribute their assets.