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