Demystifying What Liquidity Pools Are in simple English

A crypto liquidity pool is a ‘digital vault’ where participants called ‘liquidity providers’ deposit or store asset pairs so traders can trade, lend, borrow, and do more with their crypto.

And this is the foundation upon which a decentralized cryptocurrency exchange DEX is built.

I’ll break these down in a moment.

Breaking down what a liquidity pool is?

First, liquidity in the blockchain is the ease at which a cryptocurrency can be swapped for another.

So a liquidity pool ensures there’s a sufficient supply of a token pair so that traders can easily swap a token for another.

Now back to the definition.

The digital vault is a smart contract (a self-executing digital contract) for storing and locking funds. And liquidity providers are the users that deposit their funds into the pool to provide liquidity to the market.

Liquidity pools are the basis upon which DeFi and decentralized exchanges work. It includes yield farming, lending, borrowing, blockchain gaming, or performing on-chain…