What it means
What a liquidity provider gives up when the prices of the tokens in a pool move apart, compared with just holding them.
The pool keeps rebalancing, so you end up with more of the token that fell and less of the one that rose.
How it works
It's small in pools of two stablecoins of the same currency and larger with volatile tokens.
Related terms
| Term | What it means |
|---|---|
| Liquidity provider | Someone who deposits tokens into a pool so others can trade or borrow, in return for a share of the fees. |
| Liquidity pool | Tokens locked in a smart contract that people can trade against or borrow from. |
| AMM | Automated market maker: a DEX that prices trades with a formula over a pool of tokens, instead of matching buyers and sellers. |
This glossary explains terms in general. It isn't investment, tax or legal advice.