A liquidity pool is a collection of funds locked in a smart contract on a blockchain, used to facilitate trading on decentralized exchanges like Uniswap or SushiSwap. These pools allow users to trade cryptocurrencies without needing a traditional order book, as they provide the necessary liquidity for transactions. Users can contribute to liquidity pools by depositing pairs of tokens, earning rewards in the form of transaction fees or additional tokens. This system helps maintain price stability and enables seamless trading, benefiting both liquidity providers and traders in the DeFi ecosystem.