What it is:
Liquidity pools are pools of tokens that provides liquidity to DEXs. Investors (AKA LP’s) act as market makers, using AMM (automated market making) mechanisms on these exchanges. In its most basic form, liquidity pools keeps a 50:50 value ratio between ETH and a second token.
Liquidity pools such as those on Uniswap use a constant product market maker algorithm that makes sure that the product of the quantities of the two supplied tokens always remains the same. Because of this algorithm, a pool can always provide liquidity, no matter how large a trade is.
Video by: finematics
Don’t forget about gas fees that have to be paid when depositing and withdrawing.