A decentralized exchange (or DEX) is a peer-to-peer exchange that allows parties to transact without an intermediary. Basically, you can trade coins directly with the other party without a middleman (E.g. Coinbase) getting all up in your business. Without a middleman, exchanges are free to list any coin and if there is a demand, someone will supply.
One of the most popular exchanges in the U.S, Coinbase, only has 32 currencies that you can buy or sell. This is in stark contrast to Uniswap or other decentralized exchanges which offer a plethora of different pairs. This is because of the stringent regulation placed on centralized exchanges, which Defi exchanges do not have.
But with so many different coins and pairs to trade from, how could liquidity exist? Well, a solution was developed where instead of traditional liquidity which required a direct counterparty, immutable code would adjust rates to incentivize lenders to provide liquidity based on a complex algorithm which tries to determine the value of an asset based on its value compared to other assets and act as an automatic market maker.