Liquidity Pool

A smart contract holding reserves of two or more tokens that enables decentralised trading and yield for depositors.

DeFi

A liquidity pool is a collection of tokens locked in a smart contract that provides the liquidity for an AMM DEX. Traders swap against the pool; liquidity providers (LPs) deposit token pairs and earn a portion of trading fees in return.

LP positions are represented by LP tokens — proof of ownership of a share of the pool. These LP tokens can often be staked elsewhere to earn additional yield, enabling 'liquidity mining' strategies.

Pools can hold two tokens (standard pairs like ETH/USDC) or more (Balancer supports up to 8 tokens). The composition, depth, and fee tier of a pool determine its attractiveness to both traders (low slippage) and LPs (high fee income).

Related Terms

AMMAutomated Market Maker — a smart contract that prices tokens algorithmically using a liquidity pool instead of an order book.DEXA decentralised exchange where users trade directly from their wallets via smart contracts, with no custodian.Impermanent LossThe loss liquidity providers experience when pool token prices diverge, relative to simply holding the tokens.Yield FarmingThe practice of moving crypto assets across DeFi protocols to maximise returns from fees, interest, and token rewards.TVLTotal Value Locked — the aggregate value of crypto assets deposited in a DeFi protocol or the sector as a whole.

Want deeper analysis on Liquidity Pool?

Search our articles →

←AMM All terms Impermanent Loss→

Liquidity Pool — Crypto Glossary | The Blockchain Oracle