A liquidity pool is a collection of crypto assets locked in a smart contract. It lets users trade, borrow, lend, or use DeFi services without a traditional order book.
Who supplies liquidity?
Users called liquidity providers deposit assets into a pool. In return, they may earn a share of trading fees or other rewards.
Risks of liquidity pools
Liquidity providers can face impermanent loss, smart contract bugs, token crashes, and changing reward rates. A pool with a high advertised yield can still lose money.
Liquidity pools are central to many decentralized exchanges and yield farming strategies.