Liquidity pools

What is a Pool?

A liquidity pool is like a digital vault containing two different cryptocurrencies that enables automatic trading between them. Think of it as a shared piggy bank where:

• Depositors (Liquidity Providers) put in both types of tokens

• Traders can instantly swap one token for another

• Smart contracts automatically handle the exchange using mathematical formulas

Simple Example: An APT/USDC pool contains:

• 1,000 ETH tokens

• 5,000 USDC tokens

• When you want to trade APT for USDC, you add APT to the pool and take USDC out

• The smart contract automatically calculates the exchange rate

Why Pools Matter:

• No order books needed - trades happen instantly against the pool

• 24/7 availability - always liquid, no waiting for matching orders

• Permissionless - anyone can create or trade in pools

• Decentralized - no central authority controls the trading

Pool Composition and Mechanics

Two-Token Requirement: Every pool contains exactly two different tokens in specific ratios:

• The ratio determines the relative price between tokens

• As trading happens, ratios change and so do prices

• More demand for one token increases its price automatically

Liquidity Provider Shares: When you add liquidity to a pool:

• You must deposit both tokens in the current ratio

• You receive "LP tokens" representing your share of the pool

• Your percentage ownership determines your share of trading fees

• You can withdraw your share plus accumulated fees anytime