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What is a liquidity pool?
A liquidity pool is a smart contract holding a reserve of two tokens that people can trade against. Users called liquidity providers deposit the tokens, traders swap in and out of the reserve, and the trading fees are shared among the depositors.
What it means for you
How much is in a pool decides how much you can sell before the price slides. A thin pool can turn a modest sale into a large loss of value, and a pool's creator can sometimes withdraw the reserve. Check the pool's depth before relying on it to sell a token.
How it works
A pool is a contract holding two token reserves. The first depositor sets the starting price by the ratio they deposit, and later depositors add both tokens in the current ratio. Each deposit mints pool-share tokens recording your portion; for a new pool the amount minted is the square root of the two deposits multiplied together. In the documented two-token design, every trade pays a 0.3% fee into the reserves, so share-holders earn it pro rata, and burning shares withdraws your portion of both reserves plus accumulated fees.
Source: Uniswap docs: Pools (v2) · checked 4 October 2026
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Educational content, not financial advice. Written by hand and checked against the source named above. Something wrong? Tell us and we reply within two business days.