Another interesting aspect about decentralized finance is how liquidity pools allow trading through the absence of a conventional matching process between a buyer and seller on an exchange.

Liquidity pools consist of digital asset pairs in smart contracts.

Those who supply the digital assets are referred to as liquidity providers. When trades happen, the traders are trading against the liquidity pool.

Prices are established using automated market makers and formulas that are based on the amount of token pairs in the liquidity pool.

In return, they get paid a portion of the trade fees as a reward.But there is no certainty that liquidity provision will bring profits to its provider.

First of all, it is important to consider such a problem as the impermanent loss, which occurs due to price changes of tokens compared to their value at the time of liquidity provision.

It can make the position less valuable than just holding the tokens.

Other factors influencing profitability include smart contract risks, trade volume changes, and transaction costs.

Some advanced protocols let users set price boundaries, but it means additional work.

In my opinion, liquidity pools are one of the crucial elements of DeFi, yet they have true value only due to trade sustainability.