Liquidity Pool (LP)
A smart-contract pool of two assets that enables automated trading; liquidity providers earn a share of trading fees but face impermanent loss and, in newer designs, added complexity from concentrated liquidity.
How this mechanic works
Liquidity pools power automated market makers (AMMs) by locking two assets in a pool so others can trade against it, with liquidity providers earning a portion of trading fees and receiving LP tokens that represent their share of the pool. (coingecko.com) Prices in constant-function market makers shift as trades occur, creating impermanent loss for providers when asset values diverge, a risk widely discussed in DeFi literature. (bis.org) A newer design, concentrated liquidity as in Uniswap v3, lets providers target price ranges to improve capital efficiency but increases complexity and risk if prices move outside the chosen range. (app.uniswap.org)