Liquidity Pools Explained
Where the tokens in an AMM actually come from — and what it means to supply them.
What you’ll learn
- •Liquidity pools hold reserves of tokens supplied by liquidity providers (LPs) — ordinary users, not the exchange itself.
- •LPs deposit an equal value of both pooled tokens and receive an LP token representing their proportional share.
- •LPs earn a share of trading fees proportional to their share of the pool.
- •'Impermanent loss' occurs when the pooled tokens' prices diverge from their ratio at deposit time, versus simply holding them.
- •The loss is only 'permanent' once you actually withdraw while prices remain diverged; it can shrink if prices realign first.
- •Pools pairing a volatile token with a stable one carry meaningfully higher impermanent loss risk than pools of correlated or stable assets.
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