What is Pools & Providers?

A liquidity pool is like a digital bucket of cryptocurrency locked in a special program called smart contract. This bucket helps make trading cryptocurrencies faster.

Imagine you have a big jar where you can store some digital coins. This jar is part of a system that lets you trade those coins automatically, without needing to find someone to trade with.

People who add coins to these jars are called liquidity providers. They do this to earn rewards, like a small portion of the fees from trades.

So, in simple terms, a liquidity pool is a way to make trading digital coins easier and faster, and people who add coins to these pools can earn rewards.

Example:

Liquidity providers deposit an equal value of two tokens into a liquidity pool. For example, they might deposit ETH and DAI.

In exchange for providing liquidity, providers receive pool tokens representing their share of the pool. These tokens can be redeemed later for their share of the pool's assets.

When traders make trades on the exchange, they trade against the liquidity pool rather than against other traders. The prices of the tokens are determined by a constant product formula based on the ratio of the tokens in the pool.

Liquidity providers earn fees from trades proportional to their share of the pool. The fees are distributed when they withdraw their liquidity.