What are Liquidity Pools?
Liquidity pools are pools of tokens locked in smart contracts that provide liquidity in decentralized exchanges in an attempt to attenuate the problems caused by the illiquidity typical of such systems. Liquidity pools are also the name given to the intersection of orders which create price levels that — once reached — see the asset decide whether to continue to move in uptrend or downtrend.
The decentralized exchanges that leverage liquidity pools are the same that make use of automated market maker-based systems. On such trading platforms, the traditional order book is replaced by pre-funded on-chain liquidity pools for both the assets of the trading pair.
In brief, Liquidity pools are crypto assets that are kept to facilitate the trading of trading pairs on decentralized exchanges.
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