Liquidity Pool

If you've ever used a DEX like Uniswap, SushiSwap, or Curve, you've traded against a liquidity pool—even if you didn't realize it. Instead of matching you with another person on the other side of the trade, DEXs use shared pools of tokens that anyone can swap against. The people who deposit tokens into these pools (liquidity providers, or LPs) earn a cut of every trade.

A typical pool holds two tokens in equal value—say, ETH and USDC. When you swap ETH for USDC, you're adding ETH to the pool and pulling USDC out. The AMM algorithm adjusts the price based on the ratio of tokens remaining, keeping both tokens available at all times.

As an LP, you earn a percentage of every trade in your pool. On Uniswap V3, that ranges from 0.01% to 1% per trade depending on the fee tier. Fees get split proportionally based on your share of the total pool.

The main risk? Impermanent loss. When the relative price of your two tokens changes, you can end up with less value than if you'd just held them. It's called "impermanent" because it reverses if prices return to their original ratio—but it becomes permanent the moment you withdraw while prices are still different.

For portfolio tracking, LP positions are a bit special: you own a share of a pool rather than fixed token amounts. Your position's value depends on both the pool's total value and current token prices. Properly tracking it requires understanding the pool mechanics and token ratios.