AMM
Liquidity Pool
Definition
A liquidity pool is a collection of funds locked in a smart contract that enables decentralized trading, lending, and other DeFi functions. Users contribute assets to pools and earn fees from trades or interest from loans.
Example
Example
The ETH/USDC pool on Uniswap contains both ETH and USDC, allowing users to swap between these tokens while LPs earn trading fees.
Risks to Consider
Risks
- Impermanent loss
- Smart contract risk
- Low liquidity periods
Common Questions
How do liquidity providers earn money?
LPs earn trading fees (typically 0.3%) from every swap, plus potential reward tokens from liquidity mining programs.
