FIRST PRINCIPLES / 6 MIN READ

What a liquidity pool does

An automated market maker holds token reserves and prices trades according to rules in a smart contract. Liquidity providers supply the assets that traders exchange. Fees are distributed according to the protocol’s rules and the active liquidity that participates in each trade.

Providing liquidity is not a fixed-rate deposit. The token composition of a position changes as traders move the price. A high volume figure is useful context, but it does not prove a pool is safe or predict the fees a new position will earn.