Definition
A liquidity pool is a collection of assets held under smart-contract rules to support activities such as token exchange or lending. Depositors supply the assets, while the protocol determines how other users can access them.
How It Works
In an automated market maker, trades change the pool’s balances and prices follow its pricing rules. Some pools accept two assets, while others use different designs. Providers may receive fees or incentives according to their share or active liquidity position. A lending pool instead makes supplied assets available to eligible borrowers.
Key Considerations
A large pool does not always offer deep liquidity at every price. Asset composition, price ranges and withdrawals matter. Providers face contract risk and may experience impermanent loss in exchange pools; lending pools have different credit and liquidation risks. Pool value is not the same as revenue, and advertised rewards are not guaranteed profit.