What is a liquidity pool?

A liquidity pool in the DeFi context is a mechanism where users make their cryptos available to facilitate trading on decentralized platforms, thus contributing to the liquidity of the decentralized market, but before they can do this, they must first have a software wallet . In return, they receive rewards in the form of additional fees or tokens.

In fact, these liquidity pools work a bit like bureaux de change. That is, to participate, you need to have crypto-currencies in both currencies involved. This is why we speak of PAIR between USDC/BTC, USDT/ETH or other examples with SOL/USDC. So you need to have enough in both currencies to be able to offer liquidity for people trading in both currencies.

There are, of course, central players known as market makers (official bureaux de change), who provide millions or even billions in liquidity for the announced peers. Either it’s millions of people offering a large pile of money to be exchanged between the two parties, or it’s large players (state-owned or otherwise) with lots of money offering the large pile of money. Trading platforms are also based on this principle.

And like any bureau de change, it pays in exchange fees between the two.