A Liquidity Pool is a smart contract that holds two or more tokens, allowing users to trade between them on decentralized exchanges (DEXs) like Uniswap or Balancer without the need for a traditional order book.
Liquidity providers deposit token pairs into these pools and, in return, receive a portion of the trading fees generated by swaps. The pool uses an automated pricing formula — most commonly x*y = k — to determine exchange rates.
Liquidity pools are the backbone of Automated Market Makers (AMMs), enabling permissionless, instant token swaps while rewarding those who supply capital to the system.
