A deposit of crypto tokens that an automated market maker (AMM) uses for trading on a decentralized exchange. Such pools provide the liqudity that enables people to connect their wallets to an exchange and swap one crypto token for another. The "swap" in the names of decentralized exchanges such as Uniswap, SushiSwap and PancakeSwap clearly state their purpose. See
decentralized exchange.
Liquidity Providers (Liquidity Miners)
Liquidity providers are people who loan their crypto to the pool in order to receive a share of the fees paid for every token exchange. Anyone with crypto can be a liquidity provider (LP); however, there are risks. Providers can lose money if the value of the tokens changes between the time of deposit and withdrawal, and volatility is a given in the crypto world for any token that is not a stablecoin (see
impermanent loss). See
stablecoin.
Token Pairs
Most liquidity pools require crypto to be deposited in pairs of equal value. Using Ethereum (ETH) and Bitcoin (BTC) as an example, if 1 BTC is equal to 10 ETH at the moment, 2 BTC and 20 ETH might be deposited. Whenever ETH is bought, its price rises because there is less ETH in the pool. Whenever BTC is bought, its price rises because there is less BTC. Automated market makers typically use a "constant product formula," which is expressed as
x * y = k, whereby K remains constant. There are pools that allow depositing of only one token while others have more than two assets. See
crypto trading pair,
AMM,
LP token and
yield farming.