DefineDeFiWeb3 Glossary

Liquidity Pool

A shared pot of two different cryptocurrencies that people can trade from. Anyone can add money to the pot and earn fees when others trade.

Example

A pool with $50 million worth of ETH and USDC on Uniswap. Traders swap between them, and pool contributors earn a cut of each trade.

Related Terms

Core Concepts
Liquidity Pool Flow DiagramShows how liquidity providers deposit tokens, traders swap through the pool, and fees are distributedLiquidityProviderETH + USDCDepositLiquidity PoolETHUSDCx × y = kFeesTraderSwaps tokensETHUSDC + Fee1. DepositAdd equal value ofboth tokens2. TradeTraders swap tokenspaying 0.3% fee3. EarnFees accumulatefor LPs to claim

⚙️How It Works

  1. 1

    Deposit

    Liquidity providers deposit equal values of two tokens (e.g., $500 ETH + $500 USDC)

  2. 2

    Pool Formation

    Deposits combine into a shared pool that anyone can trade against

  3. 3

    Trading

    Traders swap tokens through the pool, paying a small fee (usually 0.3%)

  4. 4

    Fee Distribution

    Fees accumulate in the pool, increasing the value of LP tokens

  5. 5

    Withdrawal

    LPs can withdraw their share anytime, receiving their portion plus earned fees

📊Key Numbers

0.3%
Typical Fee
per trade on most DEXs
$500M+
Top Pool TVL
largest pools like ETH/USDC
$1B+
Daily Volume
across major DEXs

⚠️Risks & Warnings

  • •Impermanent loss can reduce your holdings if token prices diverge significantly
  • •Smart contract bugs could result in loss of deposited funds
  • •Low liquidity pools may have high slippage, making them less attractive to traders
Browse All Terms