Liquidity Pool

A liquidity pool is a smart contract that holds a reserve of two or more tokens which traders can swap against on a decentralised exchange. Users called liquidity providers deposit tokens in the required ratio and receive LP tokens representing their share, then earn a portion of the fees paid by traders and can redeem their share later. Pools replace the traditional order book with shared inventory that is always available, which is why they underpin most DeFi trading, lending and yield products. The risks are real: a pool is only as safe as its smart contract, and a provider can withdraw a different mix of tokens than the one deposited, an effect known as impermanent loss.