Liquidity pools are automated market maker (AMM) smart contracts that exchange assets algorithmically using on-chain reserves.
Liquidity on traditional asset exchanges has historically been provided by a small handful of professional trading firms with permissioned access and specialized tools. This concentrates liquidity in the hands of a few actors who can withdraw and manipulate assets during periods of volatility and restrict trading when users need it the most.
In contrast, AMM pools allow liquidity to flow from an unlimited number of everyday users, lowering the barrier to token creation and yield generation, and increasing resistance to market manipulation and censorship.
Launched in June 2017, Bancor created the first-ever network of AMMs on the blockchain. Since then, AMM liquidity pools have evolved into a core building block of decentralized finance (DeFi), attracting over $30 billion in locked value across numerous blockchains.