Definition
A liquidity pool is a collection of assets held under a protocol's rules to support activities such as trading or lending. In an automated market maker, users trade against the pool's reserves, and liquidity providers contribute assets that make those exchanges possible. Providers typically receive a recorded claim on a share of the pool and may earn fees or incentives. The composition and value of that claim can change as trades occur and market prices move. Providing liquidity is therefore not equivalent to simply holding the deposited tokens. One important risk is loss relative to holding the same assets separately, often called impermanent loss, which can remain economically real when liquidity is withdrawn. Pool depth, fee rules, contract security, token behavior, and withdrawal conditions also matter. A large displayed yield does not by itself explain the source or durability of returns.
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