Liquidity pools

A liquidity pool is a smart contract holding two (or more) tokens, against which traders swap and from which liquidity providers (LPs) earn fees. It's the mechanism that replaces the traditional order book in most DeFi trading — instead of quotes from professional market makers, anyone can deposit tokens and collect a share of the trading fees. The price is determined by a formula on the pool's reserves (see AMM), so LPs don't have to quote anything — they're passive. The catch is impermanent loss: if the price moves a lot, you end up with more of the losing token than if you'd just held both. Pool depth directly controls slippage — a $10M pool swallows a $100k trade cleanly, a $100k pool gets wrecked by it.