A liquidity pool is a smart contract that holds token reserves to enable automated market making (AMM) without order books.
Liquidity pools replace order books by letting users trade against token reserves priced by a formula. LPs deposit pairs of tokens and earn a share of fees proportional to their contribution.
"In a constant product AMM, x*y=k ensures liquidity at all prices, with slippage based on trade size relative to pool depth."
"LPs receive liquidity tokens representing their stake, redeemable for underlying assets plus accrued fees."
Risks include impermanent loss from price divergence, smart contract exploits, oracle manipulation, and MEV. Protocols mitigate via audits, bug bounties, and design improvements.
"Highly volatile pairs can cause significant impermanent loss for LPs during large price moves."
"Flash loans can amplify short-term price manipulations impacting pool health."
All terms and definitions may update as the Cryptionary improves.