A liquidity pool is a collection of funds locked in a smart contract on a blockchain, used to facilitate trading on decentralized exchanges (DEXs). These pools allow users to trade cryptocurrencies without needing a traditional order book, as they provide the necessary liquidity for transactions. Users, known as liquidity providers, contribute their assets to these pools and earn fees from trades that occur within them. This system helps maintain price stability and reduces slippage, making it easier for traders to buy and sell assets like Ethereum or Bitcoin efficiently.