GlossaryIntermediate
Liquidity Pool
A shared pool of tokens that traders swap against, often funded by other users.
A liquidity pool is a shared collection of two or more tokens locked in a smart contract, which traders can swap against directly. Pools are commonly funded by users called liquidity providers.
The size and balance of a liquidity pool affects how much a given trade will move the price and how much slippage a trader might experience. See Kaavon's "Automated Market Maker" glossary definition for the formula that actually sets those prices, and "Liquidity Provider" and "Impermanent Loss" for who funds a pool and the real risk they take on by doing so.
Examples
- A liquidity pool might hold two different tokens in a ratio that determines their relative price.
- A deeper liquidity pool generally allows larger trades with less price impact.