Liquidity Pool

A liquidity pool is an Aave market instance that enables users to participate as suppliers or borrowers. Governance-approved parameters, such as reserve configurations and collateralization thresholds, define each pool. Suppliers provide liquidity into the pool that borrowers can access through overcollateralised positions. In return, suppliers earn interest, while borrowers can obtain liquidity against their collateral, all facilitated through decentralised smart contracts.

Aave liquidity pools operate on a blockchain network governed by decisions that define the chain and reserve parameters. Parameter decisions must balance liquidity demands for various actions with risk management. The use of smart contracts validate parameters, executing the actions of borrowing, repaying, and liquidation processes seamlessly without intermediaries. This decentralised approach enhances the transparency, efficiency, and security of financial interactions within the pool.