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What is the function of a liquidity pool?

In centralized finance, trades are made from order books, meaning that a buyer must come to an agreement with a seller to exchange assets at a given price.

On the other hand, in decentralized finance, thanks to liquidity pools, order books are often replaced by Automated Market Makers (AMM). These are computer programs that enable assets to be exchanged automatically, without relying on a trusted third party, and without waiting for a corresponding offer to sell. This is achieved thanks to an algorithm and the liquidity deposited by liquidity providers.


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