A liquidity pool is a smart contract containing locked funds of two or more tokens. It’s the foundation of decentralized exchanges (DEXes) like Uniswap and Jupiter.
How It Works
Instead of matching buyers and sellers on an order book, a DEX uses a pool. For example, ETH and USDC in a 50:50 ratio. When someone buys ETH, they sell USDC into the pool — the price adjusts automatically using the formula x × y = k.
Liquidity Providers (LPs)
Users who deposit funds into the pool are liquidity providers. They receive LP tokens and a share of trading fees. This is a form of yield farming.
Risks
The main risk is impermanent loss. Also, pools can be hacked if the smart contract has bugs.
Disclaimer: This is not financial advice. Always do your own research.