WHAT IS A LIQUIDITY POOL?

Imagine you have a big jar of candies. People want to trade one type of candy for another. To make this happen smoothly, you decide to create a candy exchange system.

• Candy Jar (Liquidity Pool): This is like the jar where you keep all your candies. In the finance world, it's called a liquidity pool. People put in different candies (or cryptocurrencies) into this jar.
• Trading Pairs (Candy Combinations): The jar doesn't just have one type of candy; it has pairs. For example, one pair could be chocolate and gummy bears. In finance, this could be Bitcoin and Ethereum.
• Swapping Candies (Making Trades): When someone wants to trade chocolate for gummy bears, they put their chocolate in the jar, and the jar gives them the equivalent amount of gummy bears. The jar makes sure the exchange is fair based on the ratio of chocolates to gummy bears.
• Fees (Candy Exchange Fee): The jar charges a small fee for each trade. This fee is shared among all the people who put candies into the jar. So, if you contributed a lot of candies, you get a bigger share of the fee.

This candy jar is like a decentralized way of trading candies. In the financial world, these liquidity pools help people trade cryptocurrencies smoothly without needing a central authority. People contribute their cryptocurrencies, the system automatically manages the trades, and contributors get a little reward for making the whole thing work.