Liquidity Pool
A pot of tokens locked in a smart contract that traders swap against, with prices set by a formula.
Instead of matching buyers and sellers, a liquidity pool holds reserves of tokens, say ETH and USDC, that anyone can trade against. The pool's smart contract quotes a price based on the ratio of what is inside. Trade against it and the ratio shifts, moving the price.
Pools are the engine behind most decentralized exchanges. Users called liquidity providers supply the tokens and earn a cut of trading fees. The main risk is impermanent loss, where your deposited mix ends up worth less than just holding the two assets.
Related terms
Someone who deposits token pairs into a pool, supplying the funds traders swap against in return for a share of fees.
Automated Market Maker (AMM)A pricing algorithm that lets a token pool quote and settle trades automatically, replacing the traditional order book of buyers and sellers.
Impermanent LossThe gap between leaving tokens in a liquidity pool and simply holding them, caused when the pooled prices drift apart.
DeFi (Decentralized Finance)Financial services run by code on public blockchains, letting people trade or borrow without a bank.