Liquidity Pool

A liquidity pool is a collection of digital assets locked in a smart contract on a blockchain, which enables decentralized trading, lending, and other financial activities. In decentralized exchanges (DEXs), liquidity pools replace traditional order books by allowing users to trade directly against a pooled reserve of assets.

How It Works

Liquidity providers (LPs) deposit pairs of tokens, such as TON and USDT, into these pools. In return, they receive LP tokens representing their share of the pool. The pool uses algorithms (such as the constant product formula x×y=k) to automatically price assets based on the relative quantities in the pool. When traders swap tokens, the pool adjusts the token balances and prices accordingly.

Benefits

Liquidity pools provide essential benefits such as reducing slippage, enabling instant trades at fair prices, and offering LPs a share of trading fees as rewards. LP tokens can also be used in other DeFi protocols to earn additional yields. By pooling liquidity, these smart contracts facilitate smooth and permissionless trading without intermediaries, making DeFi platforms more efficient and accessible.

Risks

However, liquidity providers should be aware of risks like impermanent loss, which arises from price fluctuations between pooled assets. Despite this, liquidity pools remain a fundamental building block of decentralized finance (DeFi) and a key innovation powering automated market makers (AMMs) across many blockchains.