Liquidity Pools Overview

A DeFi liquidity pool is a smart contract that locks tokens to ensure liquidity for those tokens on a decentralized exchange. Users who provide tokens to the smart contract are called liquidity providers.

The main idea with pooled liquidity is that a "Liquidity Provider" locks up separate assets in a smart contract. Anyone can come exchange one of the assets for another in a sort of "automated vending machine". There is a fee for each trade that is paid to the liquidity provider to incentivize users to participate.