What are crypto liquidity pools?

Crypto liquidity pools, which facilitate decentralized trading and other financial operations in decentralized finance (DeFi), are collections of cryptocurrency funds secured by smart contracts. 

They enable users to trade directly against the pool’s liquidity, thus eliminating the need for traditional order books. Funds in the liquidity pools are supplied by participants known as liquidity providers (LPs). For contributing their assets, LPs earn rewards, usually in the form of governance tokens or transaction fees.

Liquidity pools are essential to decentralized finance (DeFi) because they provide a steady supply of funds for transactions and facilitate easy swaps between token pairs. They are the core technology behind decentralized exchanges (DEXs), such as Uniswap, and facilitate effective and convenient trading without the need for intermediaries.

Thanks to liquidity pools, projects get a decentralized means of generating markets for their tokens, enhance visibility, and draw in users. Investors get an opportunity to earn passive income and diversify investments. Liquidity pools play a key role in driving the growth and accessibility of DeFi ecosystems.

Did you know? In Uniswap v3, 20% of the pools held 92.46% of the trading volume from March 2021 to April 2023.

What are fake liquidity pools, and how do they function?

Fake liquidity pools demonstrate the dark side of DeFi, where scammers take advantage of the trust and decentralized struct