What is Liquidity pool?
Tokens locked in a contract that traders swap against, earning the pool's fee share.
Liquidity providers deposit pairs of assets. Swappers pay a fee that accrues to the pool, in proportion to their share of it.
The catch is that providers hold an ever-shifting basket. If one side's price moves, the pool rebalances away from the asset that went up, which is the impermanent-loss problem.
Related terms
An exchange that prices trades with a formula and pooled liquidity instead of an order book.
- Impermanent lossDeFi
The gap between supplying liquidity and simply holding the two assets as prices diverge.
The value of assets deposited in a protocol's contracts; its main usage measure.