Liquidity Pool (LP)

A liquidity pool is a smart-contract reserve of two tokens that powers on-chain swaps via an automated market maker (AMM). Traders swap against the pool, and liquidity providers earn a share of the trading fees proportional to their contribution. Uniswap v3 introduced concentrated liquidity, allowing LPs to specify price ranges for their capital to improve capital efficiency, though this adds complexity and specific risk. Proponents say liquidity pools democratize trading and reduce slippage; critics warn of impermanent loss and capital risk that can offset gains.