Definition
A collection of cryptocurrency funds locked in a smart contract that provides liquidity for decentralized exchanges. Users who contribute to liquidity pools earn fees from trades.
Why It Matters
Liquidity pools are the backbone of decentralized trading. They enable token swaps without traditional order books and create earning opportunities for liquidity providers.
Example
A user deposits equal values of ETH and USDC into a Uniswap liquidity pool and earns a share of the 0.3% fee charged on every swap.
Related Terms
DeFi
DEX
Yield Farming