Liquidity Pool
a.k.a. LP, Pool
A pot of two or more tokens locked in a smart contract that traders swap against, funded by users who earn a share of fees.
A liquidity pool is a shared pot of tokens, say ETH and a dollar stablecoin, locked in a smart contract. Traders on a decentralized exchange swap against the pot, and an automated market maker formula sets the price.
The people who fill the pool, liquidity providers, get a receipt token and a share of every trading fee. The risk: when prices move, the formula leaves you holding more of whichever token fell and less of the one that rose, sometimes ending worse off than if you had just held. This is called impermanent loss. Pools are also what rug pullers drain.
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