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A liquidity pool is composed of various cryptocurrencies locked in a smart contract, designed to facilitate easier trading between different tokens. Unlike traditional markets, where traders buy and sell directly from one another, liquidity pools allow for a decentralized method of trading through automated systems. In the crypto realm, these pools provide necessary liquidity, enabling trades to occur without the need for direct matches between buyers and sellers.
There are two main types of mechanisms for executing trades within these pools: order book markets and automated market makers (AMMs).