Liquidity Pool
Quick Answer
A liquidity pool is a smart contract with paired token reserves enabling decentralised swapping, providing the on-chain liquidity for payment settlement conversions.
Full Definition
A liquidity pool is a smart contract containing paired token reserves that enables decentralised token swapping. Liquidity providers deposit equal values of two tokens and earn trading fees from swaps. Pools power automated market makers (AMMs) on DEXs like Uniswap and PancakeSwap. In payment settlement, liquidity pools provide the on-chain liquidity needed to convert received crypto into the merchant's settlement currency.
Related Terms
Layer 1 (L1)
Layer 1 is the base blockchain network (Ethereum, Bitcoin, Solana) that processes and finalises transactions independently, providing security guarantees for higher layers.
Layer 2 (L2)
Layer 2 is a protocol built on top of Layer 1 to improve scalability and reduce fees. Networks like Polygon, Arbitrum, and Base reduce costs to fractions of a cent.
Liquidity
Liquidity is the ease with which crypto can be traded without affecting its price. Deeper liquidity means better exchange rates and less slippage during payment settlement.