Liquidity Pool

The cryptocurrency and financial markets both depend on liquidity. It is a process that swiftly and effectively turns assets into cash while preventing sharp price fluctuations. It takes a lengthy time to convert an asset to cash if it is illiquid. Slippage, or the discrepancy between the amount you wanted to sell an item for and the price it was sold for, is another possibility.

A significant factor in the development of a liquid decentralized finance (DeFi) system is liquidity pools.
Imagine waiting in a fast-food restaurant to place your order. Similar to having several cashiers, liquidity. Orders and transactions would move more quickly as a result, pleasing customers. Illiquidity, on the other hand, is like having one cashier serving a long line of customers. Slower orders and slower transactions would result, which would result in dissatisfied customers.

In conventional finance, the buyers and sellers of an asset provide the liquidity. DeFi, on the other hand, runs on liquidity pools. Without liquidity, a decentralized exchange (DEX) is like a plant without water. It won't endure. A lifeline for DEXs is liquidity pools.