Definition ∞ A DeFi Liquidity Pool is a collection of digital assets, typically two different tokens, locked in a smart contract to facilitate decentralized trading. These pools are the backbone of automated market makers (AMMs) on decentralized exchanges, enabling users to swap tokens without needing traditional buyers and sellers. Users who deposit their assets into these pools become liquidity providers, earning a share of the trading fees generated. The size of the pool influences the efficiency and slippage of trades.
Context ∞ DeFi Liquidity Pools are central to news discussions surrounding decentralized finance, particularly regarding trading volume, yield farming, and impermanent loss. Their growth and stability are critical indicators of the health and functionality of various DeFi protocols. Reports often highlight new pools, incentive programs, and security audits related to these fundamental components of the decentralized economy.
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