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How Do Liquidity Pools in DEXs Work?

Users lock pairs of tokens in a smart contract, creating a pool that traders can use for swaps, earning fees in return.
Greeks.Live23.11.25

How Do Liquidity Pools in DEXs Work?

Liquidity pools are pools of tokens locked in a smart contract on a decentralized exchange. Users, called liquidity providers (LPs), supply an equal value of two tokens to a pool.

In return, they receive LP tokens representing their share of the pool. Traders can then swap tokens using this pool, with the price determined by the AMM formula.

LPs earn trading fees from the swaps that occur in their pool, incentivizing them to provide liquidity.

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