Liquidity pool

How it is used

Liquidity pools are the core of most decentralized exchanges. Liquidity providers (LPs) deposit a pair of tokens and receive LP tokens as a receipt. Their main risks are smart contract bugs and impermanent loss, which happens when the prices of the two tokens move apart.

Example sentences

1. The new token has only one small liquidity pool, so even modest trades move its price a lot.

2. The developers withdrew all the funds from the liquidity pool and disappeared.

Common collocations

• deposit into a liquidity pool
• LP tokens
• pool share
• stablecoin pool
• drain a liquidity pool

Related terms

• liquidityHow easily an asset can be bought or sold quickly without moving its price much. In DeFi, it also means the funds that users deposit into pools so that others can trade.
• automated market makerA type of decentralized exchange that sets prices with a mathematical formula and trades against liquidity pools, instead of matching buyers and sellers in an order book.
• decentralized exchangeAn exchange that runs on smart contracts, letting users trade directly from their own wallets without handing their funds to a company. Often shortened to DEX.
• yield farmingMoving crypto between DeFi protocols, for example by providing liquidity or lending, to earn rewards that are often paid in the protocols' own tokens.
• rug pullA scam in which the creators of a crypto project suddenly take investors' money and disappear, for example by removing all the liquidity from a token's trading pool.

More terms: DeFi & NFTs

• DeFi
• NFT
• collateral