What Is Liquidity Pool?
Definition
A liquidity pool is a pair of tokens locked in a smart contract that enables decentralized trading on automated market makers (AMMs) like Raydium and Uniswap.
A liquidity pool is a collection of funds locked in a smart contract. These pools power decentralized exchanges (DEXes) by providing the token reserves needed for trading. Instead of traditional order books, DEXes use the constant product formula (x * y = k) to determine prices.
When you provide liquidity, you deposit an equal value of two tokens (e.g., SOL + your token) into a pool. In return, you receive LP (Liquidity Provider) tokens representing your share. You earn trading fees proportional to your share of the pool.
- Impermanent loss: When the price ratio of your deposited tokens changes, you may receive less value than if you had simply held them.
- LP tokens: Represent your share of the pool. Can be burned to permanently lock liquidity (builds trust with buyers).
- AMM: Automated Market Maker — the algorithm that prices trades against the pool.
On Solana, Raydium is the dominant AMM. On Ethereum and Base, Uniswap v2 pools are the standard. CoinDevTools supports creating and managing pools on all three chains.