Liquidity Pool
A liquidity pool is a smart contract that holds funds and enables decentralized trading by allowing users to swap tokens against the pool's reserves.
How this mechanic works
In automated market maker (AMM) models like Uniswap, a pool holds reserves of two assets and uses a pricing formula to determine swap rates; traders swap against pool reserves, and fees accrue to liquidity providers. (developers.uniswap.org) Liquidity providers deposit tokens into a pool and receive liquidity pool tokens representing their share; they earn a portion of the trading fees proportional to their contribution. (developers.uniswap.org) The model replaces order books with a pool-based mechanism that enables automated pricing and broad participation, but critics warn about impermanent loss and capital inefficiency in some pool setups. (en.wikipedia.org) For example, Uniswap v2 uses two-asset pools, while Uniswap v3 introduces concentrated liquidity to improve capital efficiency. (developers.uniswap.org)} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} }}}} {