What is a liquidity pool?

A liquidity pool refers to a "pool of liquidity" within a protocol. Decentralized finance users deposit cryptoassets in these DeFi protocols to provide liquidity that other users can borrow.

Liquidity providers are rewarded by fees paid by borrowers and/or by LP tokens, which provide proof of deposit of assets immobilized within the pool.

The liquidity pool system allows continuous trading without a trusted third party. A liquidity pool is designed to maintain a balance between the value of the various cryptoassets it contains.