binance world 🌎 of day
Definition:
A liquidity pool is a collection of cryptocurrencies locked in a smart contract that provides liquidity for decentralized exchanges (DEXs), lending protocols, and other DeFi platforms.
Why It Matters:
Liquidity pools are the backbone of automated market makers (AMMs) like Uniswap, PancakeSwap, and SushiSwap. Instead of using traditional order books, these platforms allow users to trade directly against a pool of assets.
How It Works:
Users called liquidity providers (LPs) deposit an equal value of two tokens into a pool (e.g., ETH and USDT). In return, they receive LP tokens and earn a share of the trading fees generated from swaps made in the pool.
Example in Practice:
On Binance Smart Chain, PancakeSwap offers a liquidity pool for CAKE/BNB. By contributing to this pool, users help others trade seamlessly between the two tokens while earning rewards.
Watch Out For:
Impermanent loss: A potential downside when the price ratio of pooled tokens changes.
Smart contract risk: Pools rely on code that could be vulnerable to bugs or exploits.
Quick Fact:
The concept of liquidity pools exploded in popularity during the 2020 DeFi boom, transforming how decentralized trading operates
