What is Liquidity Pool?
Also known as: LP, liquidity
A smart-contract reserve of two paired tokens that lets people trade against it on a decentralized exchange.
A liquidity pool (LP) is a pair of token reserves locked in a smart contract — for a memecoin, typically the token paired with SOL, ETH, or a stablecoin. Traders swap against the pool, and an automated market maker (AMM) formula sets the exchange rate based on the ratio of the two reserves.
Pool depth determines slippage: a thin pool means even small trades move price sharply. For memecoins, "locked" or "burned" LP is a trust signal — it means the team cannot withdraw the liquidity and rug the holders.
Liquidity providers earn a share of trading fees, but face impermanent loss when the token’s price diverges from the paired asset.
Related terms
DEX (Decentralized Exchange)
A peer-to-peer exchange where token swaps execute via smart contracts and liquidity pools instead of a central order book.
Slippage
The difference between a trade’s expected price and the price it actually executes at, driven by liquidity depth and volatility.
Rug Pull
A scam where a token’s creators drain liquidity or dump their holdings, collapsing the price to near zero.
Graduation
The moment a launchpad token fills its bonding curve and migrates to a decentralized exchange with permanent liquidity.