What is a liquidity pool
Liquidity pool is a collection of crypto assets locked in a smart contract that enables trading on decentralized exchanges (DEX).
Liquidity pools allow users to trade tokens at any time without requiring a centralized intermediary or registration.
Assets are typically deposited into liquidity pools in equal value ratios, for example 50% USDT and 50% USDC.
Liquidity pool explained simply
A liquidity pool is a shared pool of tokens that allows users to exchange cryptocurrencies.
How liquidity pools work
Users deposit tokens into the pool and receive liquidity provider tokens (LP tokens) in return.
These tokens represent the user's share of the pool and allow them to earn a portion of the trading fees.
Decentralized exchanges use the pooled assets to execute token swaps automatically.
Example of a liquidity pool
On the Uniswap exchange, users can deposit a pair of tokens such as ETH and USDC into a liquidity pool.
Where liquidity pools are used
Liquidity pools are widely used in:
Related concepts
FAQ
Who can add liquidity to a pool?
Any user who owns the required tokens can provide liquidity.
How do liquidity providers earn money?
Liquidity providers receive a portion of the trading fees generated by the pool.