What Is a Liquidity Pool in the Context of Decentralized Lending?

A liquidity pool in decentralized lending is a large pool of digital assets locked in a smart contract. Users, known as liquidity providers, supply assets to these pools to earn interest or other rewards.

Borrowers can then draw from this pool of assets, providing collateral in return. This model allows for lending and borrowing to occur without direct matching of individual lenders and borrowers.

The smart contract manages the pool, sets interest rates algorithmically, and ensures that there is always liquidity available for users to trade or borrow against.