Liquidity Pool

A smart contract holding token reserves used by AMMs to enable trading.

In depth

Liquidity providers (LPs) deposit equal value of two tokens, receive LP tokens representing their share, earn proportional trading fees. Risk: impermanent loss when token prices diverge. Pool composition determines slippage characteristics.

Related terms

AMM (Automated Market Maker)

A DEX mechanism that prices assets using mathematical formulas and liquidity pools, not order books.

DEX (Decentralized Exchange)

A cryptocurrency exchange that runs on a blockchain via smart contracts, with no central operator.

DeFi (Decentralized Finance)

Financial services (lending, trading, derivatives) built on public blockchains via smart contracts.

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