Q & A

What is a liquidity pool?

DeFi / Hiturunk Oct 16, 2020 2 Answers

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Liquidity pools are pools of tokens that are locked in a smart contract. They are used to facilitate trading by providing liquidity and are used by some of the decentralized exchanges (DEX).


In its basic form, a single liquidity pool holds 2 tokens and each pool creates a new market for that particular pair of tokens (for example ETH/USDC).

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A Liquidity Pool is a depository of crypto assets utilized in swaps. The smart contract governing the liquidity pool automatically buys and sells assets to bring the pool to whatever % equilibrium the pool is set too.


For example, UniSwap utilizes a 50/50 liquidity pool structure and assets must be added in equal amounts. Liquidity providers in the pool accrue fees in proportion to the liquidity they provide.

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