What is a liquidity pool?

A liquidity pool is a digital pile of cryptocurrency locked in a smart contract. This results in creating liquidity for faster transactions.

Liquidity pool facilitates trading by providing liquidity and is widely used by decentralized exchanges to increase liquidity among market participants.

The fact that liquidity is so important is that it largely determines how asset prices change. In illiquid markets, a relatively limited number of open position orders are opened on all sides of the order book. This suggests that a single trade can affect prices in any direction by a large margin, making tokens unpredictable and unattractive. Liquidity pool is an important part of the DeFi. Typically, these pools help the exchange of a large number of assets to any other supported assets.