Liquidity pool

A liquidity pool is a collection of funds locked in a smart contract that enables cryptocurrency trading on decentralized exchanges (DEX) using the Automated Market Maker (AMM) model. Instead of a traditional order book, trades are executed based on an algorithm that adjusts asset prices according to supply and demand within the pool.

Funds in a liquidity pool come from users called liquidity providers, who deposit token pairs and, in return, receive a share of the transaction fees generated by trades. While liquidity pools improve trading efficiency, they also carry risks, such as impermanent loss, which occurs when the value of one token in the pool changes significantly relative to the other.