What Is the Purpose of a Liquidity Pool in Decentralized Finance (DeFi)?
A liquidity pool is a collection of funds locked in a smart contract, providing the necessary liquidity for decentralized exchanges (DEXs) to facilitate trading. Users deposit pairs of tokens and earn trading fees in return, acting as automated market makers.
Glossar
Decentralized Exchanges
Access ⎊ These platforms offer permissionless entry to cryptocurrency and tokenized asset markets, democratizing capital deployment into novel financial structures.
Decentralized Finance
Architecture ⎊ Decentralized Finance, within the cryptocurrency ecosystem, represents a paradigm shift in financial infrastructure, moving away from centralized intermediaries towards peer-to-peer systems leveraging blockchain technology.
Liquidity Pool
Mechanism ⎊ A liquidity pool functions as an incentivized counterparty in decentralized finance, aggregating capital from multiple participants to facilitate trading without traditional intermediaries.
Automated Market Maker
Architecture ⎊ Automated Market Makers (AMMs) represent a paradigm shift in decentralized exchange, employing mathematical formulas to determine asset prices and facilitate trading without traditional order books.
Trading Fees
Cost ⎊ Trading fees represent a quantifiable deduction from capital employed in executing strategies across cryptocurrency, options, and derivative markets, directly impacting net profitability and risk-adjusted returns.