A liquidity pool is a collective accumulation of tokens that are often locked by smart contracts to offer liquidity on decentralized exchanges. Liquidity is often used to address some of the most common problems that arise from illiquidity.
DEXs that make use of liquidity pools are also responsible for facilitating automated market-maker-based systems. Any pre-funded on-chain liquidity pool replaces the traditional order book that is conventionally used.
Liquidity pools are also advantageous since it doesn’t require buying or selling among peers. The pre-funded liquidity pool makes sure that trades are executed with very limited slippage, even for any illiquid trading pair, given the size of the liquidity pool.