Liquidity pools and the DeFi ecosystem

Liquidity pools are collections of digital assets that may be traded automatically using smart contracts and without human intervention on decentralised exchanges (DEX). Users of these exchanges do not rely on a central authority to retain their funds but instead conduct business with one another directly. Traditionally financial markets refer to liquidity as the ease with which an asset can be bought or sold without causing significant alteration in the price. However, DEX utilises Automated Market Makers (AMM) as there are no intermediaries, meaning liquidity pools play a crucial role in enabling efficient trading and lending of digital assets. So, AMM are, in effect, algorithms used to calculate the price of an asset, dependant on the number of buyers and seller at any one time. Therefore, liquidity pools and AAM are also essential elements of the ecosystem supporting DEXs. Similar to market makers on traditional exchanges, liquidity pools are a cutting-edge tool for boosting crypt…