Liquidity Pool
In DeFi (Decentralized Finance)
Plain English
Imagine a community pot of money where people put in different types of coins, and anyone can trade between those coins instantly. Contributors earn fees from trades. It’s like a exchange bureau that runs automatically without employees.
Technical
Smart contract-based reserves of token pairs that enable decentralized trading through Automated Market Makers (AMMs). Liquidity providers deposit equal values of two tokens, receiving LP tokens representing their share. Trading fees and price impact are determined by mathematical formulas (constant product x*y=k for most AMMs). Solana DEXs like Orca and Raydium implement efficient liquidity pools.