defi
Liquidity Pool
A smart-contract pool of two or more tokens that enables trading on a DEX. Liquidity providers deposit capital and earn a share of the fees.
Liquidity Pool
A liquidity pool is a smart-contract pool holding two or more tokens, enabling trading on a decentralized exchange. Instead of matching buyers and sellers directly, you trade against the pool.
How it works
- Liquidity providers (LPs) deposit token pairs into the pool.
- Traders swap against the pool and pay a fee.
- The fees are distributed proportionally to the LPs.
Opportunities and risks
Providing liquidity can earn fees but carries the risk of impermanent loss: if the prices of the deposited tokens diverge significantly, the position’s value can end up below simply holding.
On Solana, protocols like Raydium, Orca, and Kamino use liquidity pools in different forms.
Related Terms
DEX (Decentralized Exchange) Slippage DeFi (Decentralized Finance) Smart Contract