Liquidity pools play a crucial role in a decentralized exchanges (DEXs) by providing liquidity for various trading pairs. Unlike traditional centralized exchanges, which rely on order books to match buyers and sellers, DEXs use liquidity pools to facilitate trading.

Liquidity providers deposit pairs of assets into these pools, which are then used to execute trades through automated market-making algorithms. In return, liquidity providers earn fees from trading activity proportional to their share of the pool.

Liquidity pools enhance market liquidity by ensuring that there are always assets available for trading, even for less frequently traded pairs.

Moreover, liquidity pools enable decentralized and permissionless trading, as anyone can become a liquidity provider and contribute to the liquidity of the exchange.