Liquidity Pools

What is a Liquidity Pool?

A Liquidity Pool is like a digital pot of tokens that people trade from. When you join a pool, you're putting your crypto into that pot so others can swap tokens — and you earn a share of the trading fees in return.

How It Works

  • You and others pour in tokens like USDC + ETH into a pool on a platform like Uniswap or Curve.

  • Traders use the pool to swap between tokens.

  • Every time they do, you earn a little fee — automatically!

What Do You Earn?

  • Trading fees: Every swap adds a tiny fee that goes to you

  • Extra rewards: Some protocols add bonus tokens on top (like yield farming)

  • APYs can range from 5% to 50%+ — depending on the tokens, volatility, and how popular the pool is.

What are the Risks?

Liquidity pools are powerful, but they come with a special risk called impermanent loss:

  • If the price of the tokens in the pool moves a lot, your balance can become unbalanced — and when you withdraw, you might get less than just holding the tokens.

  • It’s “impermanent” because if the price returns to where it was, the loss goes away — but that’s not always guaranteed.

Other risks include:

  • Smart contract risk (bugs in the pool’s code)

  • Low liquidity risk (harder to exit if the pool is small)

  • Pool reward farming risk (some rewards might lose value fast)

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