What are liquidity pools in DeFi?
Liquidity pools have a collection of crypto assets locked in a smart contract. They are quite helpful in decentralized exchanges, lending platforms, etc.
For a decentralized platform like an exchange to work, liquidity pools must be present.
Usually, the users provide liquidity in the pool and get rewarded
Liquidity providers have to add an equal value of two tokens in a pool and end up with Liquidity Pool tokens representing their percentage of ownership of the pool
The rewards given to Liquidity providers are from the trading fees charged to those that have carried out transactions in the decentralized exchange or lending protoco
The trading fee is shared as a reward to the users based on their share of the total liquidity
It is important to note that there are risks attached to liquidity provision in pools too