Liquidity is a collection of cryptocurrencies or digital assets made available by users called liquidity providers to enhance the trade between assets on a DEX. Liquidity pools are now of utmost importance to decentralized exchanges as they also need liquidity among asset pairs to keep the market stable for traders.
The concept of liquidity pools is used to replace order books and market makers and work with AMMs. The funds in the liquidity pool are locked in for a certain amount of time on the decentralized exchange with the trading commission of assets in the pool shared with the Liquidity Providers.
Liquidity pools are peer-to-contract as trades are executed against the liquidity in the pool and not against a counterparty. As automated market makers work with no third-party interference, liquidity pools become the engine for AMMs bringing their algorithm to life. Liquidity pools can be found on popular decentralized exchanges such as Uniswap, Pancakeswap, etc.