Liquidity pool

The liquidity provider deposits value across the pair's assets and the contract mints a token proportional to their share, a fungible LP token or, in Uniswap v3 and later, a position represented as an NFT. Each swap pays a fee tier that accrues in the pool and is split among providers according to their share, which is their economic incentive. To exit, the provider burns the token or NFT and recovers their portion of the reserves plus accrued fees. The characteristic risk is impermanent loss, which appears when the relative price of the assets changes versus the deposit and becomes permanent if withdrawn in that state. In Uniswap v3 the position is also defined by a price range through ticks, and out of range it stops earning fees.

It is the liquidity source that replaces the order book and traditional market makers in DeFi. Without pools there is no AMM and no DEX. It lets any user become a liquidity provider and earn yield from fees and, at times, from token incentives, known as liquidity mining.