Liquidity Pools

(v1.0)

Liquidity pools are a novel concept that originated in DeFi and have since become essential to the workings of the overall system. Liquidity pools are what enable Automated Market Makers (AMMs), such as DeepSwap, to create liquid markets around all kinds of assets, allowing for them to be traded without the need for a counterparty or order book (as it is in traditional finance).

Liquidity pools work by holding an amount of certain assets (determined by the pool’s pair) that anyone can trade against, at any time. A small, variable fee is charged each time a user makes a swap using that pair. Users can lend their unused assets to a liquidity pool for a portion of the fees generated and become what is known as a Liquidity Provider, or LP. It is accurate to think of providing liquidity as spiritually similar to someone making a bank deposit in the real world and earning interest (fees) on their deposit.