none of you actually knows how liquidity works

Please explain how liquidity works

3000 $anon for the best explainer

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Uniswap V2 uses a constant product formula: K = X * Y, where X and Y are the token reserves (this is the liquidity), and K is constant. Swaps adjust reserves while keeping K unchanged. The amount of token Y received is based on the change in X, calculated from the updated equation.

Larger trades shift the reserve ratio, reducing liquidity and worsening the price for subsequent swaps. Liquidity is the pool’s reserves, always balanced by K = X * Y. 

Swapping depletes one token and increases the other, making future trades less efficient.