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What is a liquidity pool?

A liquidity pool is a collection of funds locked in a smart contract. Liquidity pools are used to facilitate decentralized trading, lending and many more functions.

  • Liquidity Pools are the game-changing innovation in Decentralized Finance (DeFi) that facilitates trading on Decentralized Exchanges (DEX) and provide liquidity through a collection of funds locked in a smart contract.
  • Users called liquidity providers (LP) add an equal value of two tokens in a pool to create a market. In exchange for providing their funds, they earn trading fees from the trades that happen in their pool.

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What Are Liquidity Pools in DeFi and How Do They Work? | Binance Academy

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