# What Is a 'Liquidity Pool' and How Does It Facilitate Trading on a DEX? ▴ Learn

**Published:** 2025-11-09
**Categories:** Learn

---

## What Is a ‘Liquidity Pool’ and How Does It Facilitate Trading on a DEX?

A liquidity pool is a collection of two or more tokens locked in a smart contract, which is used to facilitate trading. Instead of matching buyers and sellers, the DEX executes trades against the assets in the pool.

The ratio of the tokens in the pool determines the price according to the AMM formula, and liquidity providers are compensated with a share of the trading fees.

How Does a Constant Product Formula (X Y=k) Govern the Price in a DEX Smart Contract?

What Is an Automated Market Maker (AMM) and How Does It Relate to Smart Contracts?

What Is the Concept of “Margin” in Derivatives Trading and How Does It Relate to Financial Security?

What Is an Automated Market Maker (AMM) in the Context of a DEX?

## Discover More

- 
### [Does Impermanent Loss Occur If Both Assets in the Pool Rise in Value?](https://crypto.greeks.live/learn/does-impermanent-loss-occur-if-both-assets-in-the-pool-rise-in-value/)
![The composition isolates smooth metallic surfaces suggesting tightly managed on-chain collateral pools or hardware wallet casings contrasted against a vibrant liquid element representing market volatility. A perfectly spherical droplet hovers near a pale blue cylindrical component likely symbolizing a key system parameter or staking mechanism like liquid staking derivatives LSTs. Water beads rest on the blue surface indicative of successful hydrophobic layer integrity crucial for secure cold storage solutions or regulatory compliance assurance. This visual metaphor speaks to maintaining pristine operational security amidst the inherent risk associated with decentralized finance DeFi leverage and gamma exposure hedging strategies in bear market consolidation. The dark background emphasizes focus on these core components essential for robust decentralized autonomous organization DAO treasury management and automated market maker AMM yield farming execution.](https://crypto.greeks.live/wp-content/uploads/2025/10/Macro-View-of-Digital-Asset-Collateralization-Structure-and-Liquidity-Bubble-Dynamics.jpg)

IL is driven by a change in the price ratio between the two assets, not by the absolute value increase of the pool's total assets.

- 
### [Explain the Relationship between Order Size and Slippage in Low-Liquidity Crypto Assets](https://crypto.greeks.live/learn/explain-the-relationship-between-order-size-and-slippage-in-low-liquidity-crypto-assets/)
![This abstract macro shot visualizes the structural interface between a granular teal demi-sphere, reminiscent of a synthetic order book material, and a sleek, highly reflective metallic component, perhaps symbolizing a blockchain ledger or cold storage mechanism. The interplay suggests the dynamic convergence between underlying asset fundamentals and derivatives pricing mechanics. The textured surface embodies synthetic exposure, akin to simulated volatility inherent in options pricing models, specifically concerning implied volatility skew across various strike prices. The sharp metallic edge evokes the precise execution layer of decentralized finance or regulated exchange platforms navigating order flow. This composition implicitly addresses the delicate balance in structuring complex financial instruments like variance swaps or perpetual futures contracts within the digital asset ecosystem where liquidity often dictates the surface geometry of market sentiment and risk parameters defining gamma exposure decay.](https://crypto.greeks.live/wp-content/uploads/2025/10/Macroscopic-View-of-Teal-Spherical-Opaque-Material-Interfacing-with-Polished-Metallic-Structural-Member-Indicating-Volatility-Surface-Contact.jpg)

In low-liquidity, larger orders consume available depth quickly, leading to a much higher magnitude of negative slippage.

- 
### [How Does the Liquidity of Staked Assets Affect Institutional Interest?](https://crypto.greeks.live/learn/how-does-the-liquidity-of-staked-assets-affect-institutional-interest/)
![This macro perspective captures a singular, sapphire-hued glass dome, suggestive of a sealed vault or transparent staking mechanism, embedded between striated layers of contrasting materiality, one dark carbonaceous texture and another pale mint haptic surface. The internal structure within the dome exhibits fragmented white inclusions, symbolizing data packets or fractionalized ownership units within a decentralized finance nexus. This composition models the immutable sealing of digital ledger entries underpinning synthetic asset creation or the settlement layer of bespoke OTC derivatives. It evokes concepts of non-custodial governance and the latent value proposition secured by cryptographic primitives, mirroring the security required for collateralized debt positions or complex perpetual swap contracts involving volatile digital securities. The metallic bezel functions as a secure enclave securing the on-chain representation.](https://crypto.greeks.live/wp-content/uploads/2025/10/Tokenized-Asset-Encapsulation-Through-Blue-Glass-Cabochon-on-Material-Substrate.jpg)

High liquidity (e.g. via LSDs) increases institutional interest due to capital mobility needs.

- 
### [How Does a Decentralized Exchange (DEX) Utilize Smart Contracts for Derivatives Trading?](https://crypto.greeks.live/learn/how-does-a-decentralized-exchange-dex-utilize-smart-contracts-for-derivatives-trading/)
![This abstract visualization renders a creamy white spheroidal payload contained within a transparent cylindrical conveyance system, suspended between two opposing curved structures emanating cyanic emissive striations, suggesting a controlled flow mechanism crucial for DeFi atomic swaps. The composition models the delicate settlement process inherent in achieving consensus for on-chain derivatives execution or novel cross-chain asset bridging. Key elements evoke concepts like liquidity provisioning synchronization, the immutable ledger interaction during settlement finality, and risk management surrounding slippage in volatile spot markets. The geometry implies a directional pathway necessary for successful smart contract interaction underpinning complex yield farming strategies or perpetual futures liquidation mechanics, emphasizing precision in decentralized exchange operations.](https://crypto.greeks.live/wp-content/uploads/2025/10/Decentralized-Finance-Atomic-Swap-Mechanism-Modeling-Spherical-Asset-Transfer-Protocols.jpg)

Contracts automate order matching, risk management, and settlement, enabling non-custodial, transparent derivatives trading directly from user wallets.

- 
### [How Does the Price Discovery Process Differ between a Lit Market with Iceberg Orders and a Dark Pool?](https://crypto.greeks.live/learn/how-does-the-price-discovery-process-differ-between-a-lit-market-with-iceberg-orders-and-a-dark-pool/)
![The sleek metallic blue planar structure overlays a luminous concave surface suggesting a tightly controlled liquidity aperture or dark pool interface. A high-gloss dark node, potentially symbolizing an embedded oracle or key management solution, sits atop the plane near three precise indicator apertures, reflecting the turquoise undertone. This configuration evokes the intricate architecture required for managing complex option strategies such as synthetic collateralized debt obligations or structured products within decentralized finance. The visual asymmetry mirrors dynamic hedging requirements against stochastic volatility inherent in perpetual futures and basis trading arbitrage scenarios on layer-two scaling solutions. Precise positioning signifies latency optimization critical for achieving superior execution priority during high-frequency market microstructure events.](https://crypto.greeks.live/wp-content/uploads/2025/10/Asymmetric-Gamma-Exposure-Volatility-Surface-Structure-Modeling-Over-Dark-Pool-Liquidity-Pools.jpg)

Lit markets with icebergs have public price discovery; dark pools are private and derive their prices from those public markets.

- 
### [What Is “Slippage” and How Does Deep Liquidity Mitigate It?](https://crypto.greeks.live/learn/what-is-slippage-and-how-does-deep-liquidity-mitigate-it/)
![This abstract rendering displays a four-winged, cruciform structure composed of sharp, geometric planes extending from a central metallic hub against a dark cosmic void illuminated by a single, powerful directional light source suggesting high-throughput data flow. The structure metaphorically embodies the architecture of advanced DeFi mechanisms like perpetual swaps or liquidity pool operations facing extreme market stress. The outward vanes suggest directional exposure, perhaps symbolizing open interest distribution or delta hedging strategies across disparate derivative contracts. The rigid framework implies the underlying smart contract logic governing algorithmic execution, crucial for maintaining collateralization ratios against rapid price discovery and managing systemic risk within nascent tokenized markets where instantaneous liquidation protocols dictate solvency within structured finance instruments.](https://crypto.greeks.live/wp-content/uploads/2025/10/Decentralized-Finance-Protocol-Configuration-Representing-Complex-Volatility-Surface-Dynamics-in-Digital-Asset-Hedging.jpg)

The gap between expected and executed trade price; deep pools absorb large orders better.

- 
### [What Is a Liquidity Pool (LP) and How Is It Used in Yield Farming?](https://crypto.greeks.live/learn/what-is-a-liquidity-pool-lp-and-how-is-it-used-in-yield-farming/)
![The visualization displays a mirrored, high-fidelity rendering of complex mechanical apparatus set against deep black, suggesting vacuum or non-linear space. Central components feature glowing cyan energy cores enveloped by opaque toroidal structures, evoking superconducting quantum circuit dynamics crucial for high-frequency cryptocurrency arbitrage. This conceptual design mirrors the synchronized settlement of complex financial derivatives like exotic options or structured products contingent on underlying blockchain volatility surfaces. The structure suggests dual independent nodes facilitating atomic swaps or cross-chain interoperability mechanisms fundamental to secure decentralized finance DeFi infrastructure design for managing counterparty risk exposure in perpetual futures contracts. The precise symmetry hints at perfectly hedged delta-neutral strategies essential for sophisticated market making protocols and liquidity provision across AMMs.](https://crypto.greeks.live/wp-content/uploads/2025/10/Symmetric-Quantum-Entanglement-Propulsion-Architectures-Modeling-Decentralized-Finance-Derivatives-Exchange-Execution.jpg)

An LP is a token pair locked in a smart contract for trading; yield farmers deposit assets to earn trading fees and rewards.

- 
### [What Is the Role of a Mining Pool in Mitigating the Risk Associated with High Difficulty?](https://crypto.greeks.live/learn/what-is-the-role-of-a-mining-pool-in-mitigating-the-risk-associated-with-high-difficulty/)
![This abstract rendering displays a symmetrical, intersecting structure against a dark, deep blue gradient background suggesting high-frequency market depth. Two bright, opposing light beams emanate diagonally, bisected by a central dark axis where translucent, almost spectral cyan shapes overlay the intersection point, resembling mirrored parabolic curves or potential functions. This visual metaphor captures the complex interplay of order flow and latent market structure inherent in decentralized finance derivatives. The configuration strongly evokes the mathematical representation of option Greeks such as delta hedging requirements or the skew induced by directional bias in perpetual swaps. Specifically, the overlapping translucent elements suggest interwoven synthetic positions, perhaps mirroring the construction of complex payoff diagrams like butterfly spreads or calendar spreads on decentralized exchanges DEXs, demanding precise computation of slippage and liquidity provider LP exposure in low-latency cryptocurrency markets. This visualization underscores systemic risk aggregation within digital asset options vaults.](https://crypto.greeks.live/wp-content/uploads/2025/10/Symmetrical-Overlays-of-Volatility-Surfaces-and-Implied-Vega-Exposure-Dynamics-in-Digital-Asset-Futures.jpg)

Mining pools combine hash power to ensure more frequent, smaller rewards, reducing the revenue variance risk caused by high difficulty.

- 
### [What Is a “Non-Fungible Liquidity Position” and Why Is It Used in CLPs?](https://crypto.greeks.live/learn/what-is-a-non-fungible-liquidity-position-and-why-is-it-used-in-clps/)
![Three distinct tubular surfaces abut at sharp angles against an absolute black void symbolizing deep market recessions or illiquidity events. The leftmost surfaces present a uniform cream and mint green finish, analogous to foundational on chain settlement layers or initial public offerings ICOs. The rightmost segment features a speckled, mottled grey and black coating reminiscent of failed or "broken" smart contract execution or compromised custodian infrastructure where unexpected dark pool liquidity manifests unpredictably. This juxtaposition mirrors the complex interplay between predictable front-end protocol architecture and latent counterparty risk inherent in decentralized finance DeFi options vaults or structured derivative products like perpetual swaps facing extreme slippage during flash crashes requiring robust capital reserve management. The light refraction highlights surface imperfections mirroring transactional opacity and the necessity for on chain transparency against complex synthetic asset overlays.](https://crypto.greeks.live/wp-content/uploads/2025/10/Bespoke-Material-Finishes-Interfacing-Layered-Asset-Allocation-Structures-Under-Extreme-Volatility-Profiling.jpg)

An NFT represents the unique, custom price range and accrued fees of an individual LP position.

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