Liquidity Pool
A smart contract holding paired tokens that enables trading on decentralized exchanges.
Explained Simply
Liquidity pools are the backbone of decentralized exchanges. Instead of order books, DEXes use pools of token pairs (like ETH/USDC) deposited by users. When someone trades, they swap against the pool rather than matching with another trader. Liquidity providers earn a share of trading fees proportional to their contribution. The main risk is impermanent loss — if token prices diverge significantly, you may end up with less value than holding.
Example
A USDC/ETH pool on Uniswap might hold $10M in USDC and $10M in ETH. Traders swap between them, paying 0.3% fees to pool providers.
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This content is for educational purposes only and does not constitute financial, tax, or legal advice. Always consult a qualified professional for advice specific to your situation.