Liquidity pools are one of the foundational technologies behind the current Decentralized Finance (DeFi) ecosystem. They are an essential part of automated market makers (AMM), borrow-lend protocols, yield farming, synthetic assets, on-chain insurance, blockchain gaming – the list goes on.
A liquidity pool is a collection of funds locked in a smart contract. Liquidity pools are used to facilitate decentralized trading, lending, and many more functions. Since anyone can be a liquidity provider, AMMs have made market making more accessible.