BlockchainIntermediate#DeFi#Market Making
Liquidity Pool
L
Definition
A collection of funds locked in a smart contract used to facilitate trading by providing liquidity on decentralized exchanges.
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Concept Diagram
Key Takeaways
1
Liquidity pools are shared reservoirs of capital enabling token swaps without order books
2
Thousands of users provide liquidity and earn a share of every trading fee
3
Larger pools mean lower slippage for traders executing swaps
4
Primary way to earn yield on idle assets while supporting DeFi growth
Practical Example
You deposit $5,000 worth of ETH and $5,000 worth of USDC into Uniswap's ETH/USDC pool - you earn 0.3% of every trade in that pair, generating passive income while others swap.
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Related Terms
Blockchain
TVL (Total Value Locked)The sum of all assets currently staked or invested within a DeFi protocol, reflecting its depth and adoption.
Blockchain
AMM (Automated Market Maker)A type of decentralized exchange protocol that relies on mathematical formulas to price assets rather than a traditional order book.
Blockchain
DEX (Decentralized Exchange)A P2P marketplace where users can trade cryptocurrencies directly without a central intermediary taking custody of funds.
Blockchain
Impermanent LossThe temporary loss of funds experienced by liquidity providers due to volatility in a trading pair within an AMM.
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