Liquidity Pools vs. Orderbooks
Traditional exchanges work with an orderbook: every buy and sell order is listed, and a trade only happens when two matching orders meet. This system requires constant activity and usually depends on professional market makers to provide liquidity.
A liquidity pool works differently. Instead of matching buyers and sellers directly, all participants deposit their tokens into a shared pool. The pool then acts as the counterparty for every trade. Traders exchange against the pool, not against a single person.
How Liquidity Pools Work
Pools usually contain two tokens (for example LIBRE/XLM).
The price is determined by a simple mathematical formula
(constant product market maker):
x * y = k. As one asset is bought, its price rises, and the other falls.
This creates automatic and continuous price discovery without a central orderbook.
How to Earn Money with Liquidity Pools
Liquidity providers (LPs) earn money in two ways:
- Trading Fees: Every trade in the pool generates a small fee. These fees are distributed proportionally to everyone who contributed liquidity.
- Rewards: Some ecosystems (including LibreTradingEcosystem) can distribute extra rewards to incentivize providing liquidity, usually in the form of native tokens.
By depositing tokens into a pool, you essentially make your assets work for you, collecting both fees and rewards over time.
Risks: Impermanent Loss
The main risk in liquidity pools is called impermanent loss. This happens when the relative price of the two tokens in a pool changes significantly. Compared to simply holding the tokens in your wallet, you may end up with fewer tokens of the more valuable asset.
The loss is called “impermanent” because if prices return to their original ratio, the loss disappears. But if prices move permanently, the loss becomes real. LPs must balance the potential earnings from fees and rewards against this risk.
👉 Ready to try it? Explore Assets and think about which pairs you would pool!