What is liquidity pool and how it works?

A liquidity pool can be thought of as a pot of cryptocurrency assets locked within a smart contract, which can be used for exchanges, loans and other applications . In traditional finance (Centralised Finance or CeFi), liquidity is provided by a central organisation, such as a bank or a stock exchange.

Liquidity pools are a mechanism by which users can pool their assets in a DEX’s smart contracts to provide asset liquidity for traders to swap between currencies . Liquidity pools provide much-needed liquidity, speed, and convenience to the DeFi ecosystem.

Depending on the pool you’re invested in and the amount of transactions on Uniswap, you can earn anywhere from 2% to 50% annual interest from liquidity provider fees.