Liquidity pool

A liquidity pool is a smart-contract-held reserve of two or more assets that supplies the funds an automated market maker uses to settle trades. Participants called liquidity providers deposit assets into the pool and, in return, typically earn a share of the trading fees generated. Traders swap against the pool rather than with a specific counterparty, and the changing balances determine the exchange rate.

The size of a pool affects how much a trade moves the price: deeper pools absorb trades with less slippage. A common misconception is that deposited assets are static; balances shift with every trade, and providers may face impermanent loss when relative prices change.