What Is a 'Liquidity Pool' and How Does It Facilitate Trading on a DEX? ▴ Learn

What Is a ‘Liquidity Pool’ and How Does It Facilitate Trading on a DEX?

A liquidity pool is a collection of two or more tokens locked in a smart contract, which is used to facilitate trading. Instead of matching buyers and sellers, the DEX executes trades against the assets in the pool.

The ratio of the tokens in the pool determines the price according to the AMM formula, and liquidity providers are compensated with a share of the trading fees.

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