ARCIPEDIA · DEFI

Plain English

A liquidity pool is a smart contract holding a pair (or basket) of tokens that traders swap against. Liquidity providers deposit tokens into the pool; the AMM algorithm uses those tokens to fulfill swap orders. The pool earns trading fees, which are distributed proportionally to providers.

How it actually works

To provide liquidity, you deposit equal value of both tokens in a pair (for traditional AMMs) and receive an LP token representing your share. The pool grows as traders swap and pay fees. Your share grows in fee income but is exposed to impermanent loss: if the relative price of the two tokens diverges significantly, your position is worth less than if you had just held the tokens separately.

What it means for you

For members, liquidity provision is a yield strategy with structural trade-offs. Stable-to-stable pools (USDC/USDT) carry minimal impermanent loss and earn modest fees. Volatile pairs (ETH/some altcoin) can pay big fees but carry significant IL risk.

How ARCrypto teaches this

We teach LP strategy: pair selection, impermanent loss modeling, fee-versus-IL math, and the venues where the risk-adjusted yield actually compensates.

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Educational content only. Not investment, tax, or legal advice.