A liquidity pool is a crowdsourced pool of tokens locked in a smart contract that enables decentralized trading and lending. On AMM DEXs (Uniswap, PancakeSwap), users deposit pairs of tokens (e.g., ETH+USDC) into pools; traders swap against the pool; LPs earn 0.3% trading fees proportional to their share. Mathematical model: x*y=k (constant product). Risks: impermanent loss (when relative prices change, LP position differs from holding tokens separately), smart contract bugs, rug pulls (devs draining funds). Top liquidity providers can earn 5-100% APR depending on volume, but high-yield pools often carry corresponding risks.
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Liquidity Pool
August 22, 2026 · Aditya Gupta
Investing
Related terms
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