What it is
Liquidity pools are essential for automated market makers (AMMs) to function. Users, known as liquidity providers, deposit an equal value of two tokens into a pool, earning a share of the trading fees generated by that pool. This pooled capital allows traders to exchange tokens without needing a direct counterparty, as they trade against the assets held within the pool.
Liquidity pools are central to the operation of decentralized finance (DeFi) protocols, particularly DEXs on Ethereum and layer-2 solutions. News frequently covers the TVL in various pools, new yield farming opportunities, or security vulnerabilities. Retail investors can contribute to liquidity pools to earn trading fees and governance tokens, but they must understand the risk of impermanent loss.
Why it matters
Liquidity pools enable decentralized trading and offer yield-earning opportunities for providers, who must be aware of impermanent loss.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice