Asset Liquidity Pool

Definition ∞ An asset liquidity pool is a collection of funds locked in a smart contract to facilitate decentralized trading. These pools consist of two or more digital assets, supplied by liquidity providers, that enable automated market making on decentralized exchanges. Users can swap assets against the pool, with prices determined by an algorithm based on the ratio of assets within the pool. Liquidity providers earn fees from trades executed against their contributed assets, incentivizing capital provision.
Context ∞ Asset liquidity pools are a fundamental component of decentralized finance (DeFi), enabling permissionless trading without traditional order books. Key discussions revolve around impermanent loss, a risk where liquidity providers’ staked assets perform worse than simply holding them, and the efficiency of different automated market maker algorithms. The future involves advancements in pool designs to optimize capital efficiency and reduce risks for providers.