Liquidity pools play a crucial role in DeFi by enabling frictionless trading and reducing reliance on centralized market makers. They provide a continuous source of liquidity, ensuring that buyers and sellers can execute trades efficiently. By participating in liquidity pools, users can earn passive income through trading fees and incentives. Liquidity pools also enhance financial inclusion by allowing anyone to contribute funds and participate in market-making. Additionally, they help stabilize token prices and prevent extreme price volatility in decentralized markets.