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)