Part 2/7:
Liquidity pools serve as vital components for decentralized exchanges (DEX) like Uniswap, Orca, and others. A liquidity pool is a collection of funds locked in a smart contract, enabling traders to swap between different tokens. For example, if a trader wants to convert Ethereum to Arbitrum, they engage in this transaction through a liquidity pool, which requires contributors (liquidity providers) to supply assets to facilitate these trades.
When trades occur within a liquidity pool, traders pay fees—usually a percentage of the transaction amount. A portion of these fees is distributed to liquidity providers, creating a passive income stream. By deploying their digital assets into these pools, individuals enable trading while earning income based on transaction activity.