> For the complete documentation index, see [llms.txt](https://tapp-exchange.gitbook.io/tapp-exchange/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://tapp-exchange.gitbook.io/tapp-exchange/user-guides/earn/liquidity-pools.md).

# 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