Liquidity pool

A smart contract holding pairs of tokens that traders swap against.

A liquidity pool is a smart contract holding reserves of two or more tokens, against which traders swap. Liquidity providers deposit equal-value amounts of each token in exchange for LP tokens representing their pool share, and earn a cut of trading fees. Uniswap v2's constant-product formula (x*y=k) was the prototype; Uniswap v3 added concentrated liquidity.

LPs face impermanent loss: when token prices diverge, the pool's automatic rebalancing leaves LPs with less value than if they'd just held the tokens. Whether IL is offset by fee income depends on the pair's volatility and trading volume.