What is a Liquidity Pool?
A liquidity pool is a collection of assets locked in a smart contract, facilitating asset trading on a decentralised exchange (DEX). Unlike traditional financial systems that rely on a central limit order book to match buy and sell orders based on price and demand, DEXs often employ an Automated Market Maker (AMM) model. This model utilises liquidity pools containing pairs of assets to determine trading prices algorithmically.
Liquidity providers (LPs) are the contributors to these pools, depositing their tokens in exchange for LP tokens, which represent their share of the pool. The AMM system calculates the price of assets within a pool using a formula, typically (x times y = k), where (x) and (y) represent the quantities of the two assets in the pool, and (k) is a constant.
This method of price determination depends on a pool's balance of assets. The significance of checking a pool's liquidity becomes apparent when considering the impact of low liquidity, which can lead to suboptimal pricing and potentially, financial loss.
BroccoliSwap aggregates liquidity offerings from various tokens, DEXs, and bridges to ensure you get the best deal for your trade.