A liquidity pool is a smart contract that holds reserves of two or more tokens, enabling decentralised trading between them. When a user swaps tokens on a DEX like Raydium or Meteora, they trade against the liquidity pool rather than a counterparty.

Liquidity providers deposit token pairs into pools and receive LP tokens representing their share. In return, they earn a proportion of the trading fees generated by the pool. The value of LP tokens fluctuates with the underlying token prices and accumulated fees.

Liquidity pools are fundamental to decentralised finance on Solana. They enable permissionless trading, price discovery, and yield generation without requiring centralised intermediaries.