Liquidity Pools
Liquidity pools are a decentralized finance (DeFi) mechanism where users deposit cryptocurrency tokens into smart contracts to provide liquidity for trading on decentralized exchanges (DEXs). They enable automated market making (AMM) by using algorithms to set prices based on token ratios, eliminating the need for traditional order books. This allows for continuous trading and reduces slippage in low-liquidity markets.
Developers should learn about liquidity pools when building or interacting with DeFi applications, such as DEXs, yield farming protocols, or lending platforms, as they are fundamental to enabling token swaps and earning fees. They are crucial for creating efficient, permissionless markets in blockchain ecosystems like Ethereum, Binance Smart Chain, or Solana, where liquidity is often fragmented.