What Is a ‘Liquidity Pool’ in the Context of Automated Market Makers (AMMs)?
A liquidity pool is a collection of two or more tokens locked in a smart contract on a Decentralized Exchange (DEX). It is funded by Liquidity Providers (LPs).
Instead of matching buyers and sellers directly, trades are executed against the assets in this pool, with the price determined by an algorithm. This mechanism is the foundation for decentralized trading and lending, providing on-chain liquidity.
Glossar
Decentralized Trading
Architecture ⎊ Decentralized trading, within cryptocurrency and derivatives, represents a shift from centralized exchange infrastructure to peer-to-peer systems leveraging blockchain technology.
Liquidity Providers
Capital ⎊ These entities supply the necessary assets to decentralized exchanges or automated market makers to facilitate continuous trading in crypto derivatives and options.
Decentralized Exchange
Architecture ⎊ A decentralized exchange (DEX) fundamentally diverges from traditional order book exchanges through its reliance on smart contracts and blockchain technology to facilitate peer-to-peer trading, eliminating the need for a central intermediary.
Smart Contract
Code ⎊ The contract is fundamentally self-executing code deployed on a distributed ledger, embodying the terms of the agreement in an immutable format.
Liquidity Pool
Pool ⎊ A liquidity pool, within the context of cryptocurrency derivatives and options trading, represents a centralized reserve of tokens locked in a smart contract, facilitating decentralized trading and price discovery.
Automated Market Makers
SystemArchitecture ⎊ Automated Market Makers represent decentralized trading protocols that utilize algorithmic functions, rather than traditional bid-ask order books, to facilitate peer-to-contract asset exchange.