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Liquidity Pool

A liquidity pool serves as a decentralized reserve of cryptocurrencies locked in a smart contract, primarily designed to facilitate decentralized finance (DeFi) activities. Found on decentralized exchanges (DEX), these pools operate on a mechanism that enables liquidity providers (LP) to contribute their digital assets to the DEX's smart contract. In return, liquidity providers receive rewards, typically in the form of trading fees, proportionate to the amount of liquidity they supply. Unlike traditional trading systems, liquidity pools eliminate the need for a direct buyer-seller match, automatically utilizing the pooled tokens to facilitate transactions. This innovative approach enhances efficiency and reliability in trading. Examples of platforms hosting liquidity pools include Uniswap, Balancer, Bancor, and Curve DAO.