DeFi & Yield

What is a liquidity pool in DeFi?

A liquidity pool is a smart contract holding a reserve of two or more tokens that traders swap against, replacing the traditional order book and buyer-seller matching. Anyone can deposit token pairs into the pool, and an automated formula sets prices based on the ratio of assets held. For example, a pool might hold ETH and a stablecoin; when someone buys ETH, the pool gives out ETH and takes in the stablecoin, shifting the price. Depositors earn a share of the trading fees the pool collects. Pools underpin most decentralised exchanges.