DeFi & Protocols Also: LP pool, liquidity pair

Liquidity Pool LP

A smart contract holding reserves of two or more tokens that facilitate decentralized trading.

A liquidity pool is a smart contract containing token reserves supplied by liquidity providers (LPs) in exchange for trading fees. When a trader swaps Token A for Token B, they interact with the pool rather than a counterparty — the pool's ratio changes, adjusting the price according to the AMM formula. LPs receive LP tokens representing their pool share and earn fees pro-rata. The composition of pool reserves provides a live, on-chain signal of market sentiment.

Related Terms

Automated Market Maker AMM A decentralized exchange mechanism that uses liquidity... Decentralized Exchange DEX A peer-to-contract trading venue where users swap tokens... Impermanent Loss IL The temporary loss liquidity providers experience when... Yield Farming The practice of deploying capital across DeFi protocols...

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