liquidity pool

/lih-KWID-ih-tee pool/ · noun · Startup & VC · Origin: 2018

Definitions

  1. A smart contract holding paired token reserves that enables decentralized trading without order books. Liquidity providers deposit equal values of two tokens and earn fees from trades. The price is determined algorithmically (typically x*y=k). Impermanent loss occurs when token prices diverge significantly from the deposit ratio.

    In plain English: A shared pot of money locked in code that lets people trade tokens without a middleman. People who contribute to the pot earn a cut of trading fees.

    Example: She added $10,000 to the ETH/USDC liquidity pool for the yield, then learned about impermanent loss the hard way when ETH rallied 40%.

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