Liquidity Pool Vs Order Books

Order Books:
- An order book is a collection of the currently open orders for any given market
- The system that matches orders with each other is called the matching engine
- Along with the matching engine, the order book is the core of any centralized exchange (CEX)
Liquidity Pools:
- A collection of pooled funds into a smart contract by liquidity providers which allows for on-chain trading without the need for an order book as no direct counterparty is needed to execute trades
  - Trading on an order book is peer-to-peer while trading using AMM’s is peer-to-contract
- When you are executing a trade on an AMM, you are executing the trade against the liquidity in the liquidity pool. For a buyer to buy, there doesn’t need to be a seller at that particular moment, only sufficient liquidity in the pool
  - When buying a coin on a DEX, there isn’t a seller on the other side in the traditional sense, Instead, your activity is managed by the algorithm that governs what happens in the pool and pricing is determined by this algorithm (AMM) based on the trades that happen in the pool

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