Ever wondered what actually happens to your crypto in liquidity pools? Here's the simple truth: when you deposit assets into a liquidity pool, you're locking funds into smart contracts. These contracts act as the backbone of decentralized exchanges and lending protocols—they hold your assets and automatically execute trades or lending operations based on preset rules.

Instead of relying on traditional order books, liquidity pools use an automated market maker (AMM) model. Your locked capital becomes the fuel that enables peer-to-peer trading on the blockchain. The smart contract manages everything—from pricing to settlement—without intermediaries.

This is why liquidity providers earn fees. You're essentially providing the infrastructure that makes DeFi trading possible.