# Liquidity Pool

*Crypto & Digital Assets — Finicade finance glossary*

A liquidity pool is a smart contract holding two assets that traders swap against, funded by liquidity providers who earn a share of trading fees. It replaces the market maker with an open pot anyone can add to. The economics are frequently misunderstood: fee income is real, but so is impermanent loss, and a pool advertising a high yield is usually compensating for a high risk of it.

**Also known as:** LP, liquidity provider, pooled liquidity

**Related terms:** [Automated Market Maker](https://finicade.com/glossary/automated-market-maker), [Impermanent Loss](https://finicade.com/glossary/impermanent-loss), [Yield Farming](https://finicade.com/glossary/yield-farming), [Decentralized Exchange (DEX)](https://finicade.com/glossary/decentralized-exchange), [Total Value Locked](https://finicade.com/glossary/total-value-locked)

Source: https://finicade.com/glossary/liquidity-pool