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Liquidity Pool

In short

Funds locked in DeFi protocols enabling decentralized trading — providers earn fees

A liquidity pool is a pot of two tokens that lets traders swap between them automatically. You provide the tokens and earn a share of trading fees. Risk: 'impermanent loss' if the prices of the two tokens diverge significantly.

Liquidity pools are smart contracts holding two assets in a ratio. Automated Market Makers (AMMs) like Uniswap use constant product formulas. Liquidity providers earn fees (0.3% per trade on Uniswap v2) but face impermanent loss risk when token prices diverge.

Formula

x × y = k (constant product AMM formula)

Related concepts

  • DeFi (Decentralized Finance) — DeFi is like a bank that runs on code with no employees. You can borrow, lend, trade, and earn interest — all automatically through smart contracts. No bank account needed, no identity verification, just a crypto wallet.
  • Gas Fees — Gas fees are what you pay to make transactions on Ethereum. When the network is busy (everyone trading), fees surge. High fees price out small users and signal heavy network activity — often during bull markets.
  • Staking — Staking lets you earn rewards by locking your crypto to help run the blockchain. Think of it like a savings account — you lock your coins and earn interest (staking rewards). ETH staking currently yields around 3-4% annually.
  • 24h Trading Volume — 24h volume shows how much of a coin changed hands today (in dollars). High volume on a price move = conviction. Low volume on a price move = potentially fake move. Volume is the lie detector of price action.