What is a liquidity pool?

Let's start by understanding what a liquidity pool is.

Unlike centralized exchanges (CEX) such as Bitso, where there are books created by the exchange to swap one token for another, decentralized exchanges (DEX) require liquidity pools to carry out these exchanges. 

A liquidity pool, typically comprising two tokens, serves as the "market" for swapping one token with another. 

How do these pools secure liquidity for each token?

Here's where it gets interesting: anyone can provide liquidity to a pool and earn commissions for doing so. 

When providing liquidity to a pool, you can earn a percentage of the trading fees generated each time a trade is executed within that pool. The percentage you earn will be proportional to your total stake in the pool.

This means that if you contribute 5% to a fund that has 0.1% commissions, then a daily trading volume of $10 million would earn you $500 per day.