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What is Liquidity Pool?
A liquidity pool is a collection of crypto funds locked in a smart contract that enables decentralized trading on DEXs. Liquidity providers earn fees from every trade.
Full Explanation
A liquidity pool is a pair of tokens locked in a smart contract on a DEX, enabling trading without a traditional order book. Liquidity Providers (LPs) deposit equal values of two tokens (e.g., ETH + USDC) and earn a share of trading fees (usually 0.3%). The pool uses an Automated Market Maker (AMM) formula (x*y=k) to determine prices. Risk: impermanent loss — when the ratio of deposited tokens changes significantly due to price movement, LPs may lose value compared to simply holding the tokens.
Related Terms
Last updated: 2026-03-21
