Trading & AMMs
Liquidity Pool
Contract-held assets used for swaps or lending
Definition
A liquidity pool holds assets in contracts for a defined purpose, such as swaps or lending. In an AMM, LP shares represent a changing basket of reserves; a lending pool instead holds lender claims and borrower debt.
Example
A fee-free pool has 100 ETH and 200,000 USDC. Adding 1 ETH and 2,000 USDC gives 1/101, about 0.99%, of the enlarged pool, not 1%, assuming no minimum-liquidity adjustment.
How it works
Deposits create claims on the pool according to its accounting rules. Swaps change reserves, while lending removes available liquidity in exchange for debt; the same label does not mean the same risk.
Risks to Consider
- Arbitrage changes an AMM share’s token composition
- A depegged reserve asset can poison the entire basket
- Lending-pool utilization can delay withdrawals
Common Questions
Is a liquidity pool the same as an LP token?
No. The pool holds assets; the LP token accounts for a share. Some concentrated-liquidity positions use NFTs rather than fungible LP tokens.
