What is a Liquidity Pool?
Understand liquidity pools and how they generate fees for you.
Key Takeaways
- A liquidity pool is a shared pot of two tokens that traders use
- Every trade pays a fee, and liquidity providers split those fees
- More trading volume means more fees for you
What is a Liquidity Pool?
A liquidity pool is a shared pot of two tokens. Traders use it to swap one token for the other.
Think of it like a currency exchange booth. The booth holds dollars and euros. When someone wants to exchange, they put one in and take the other out. The booth charges a fee.
In DeFi, you are the booth. You put your money in the pool. Traders pay you fees to use it.
How Fees Work
Each pool has a fee tier. Common tiers:
- 0.01%: Very low fee, for very stable pairs
- 0.05%: Low fee, for stablecoin pairs
- 0.30%: Standard fee, for most pairs
- 1.00%: High fee, for volatile pairs
Every time someone trades, they pay this fee. The fee gets split among all liquidity providers based on their share of the pool.
An Example
Say a WETH/USDC pool has $10 million in total liquidity. You provide $10,000 (0.1% of the pool).
Today, traders do $5 million in volume. The pool charges 0.30% per trade. Total fees: $15,000.
Your share: 0.1% of $15,000 = $15 for that day.
That is $15 per day on a $10,000 deposit, or about 55% per year.
(Real numbers vary based on volume, competition, and your range width.)
Why Pool Choice Matters
Some pools get lots of trades. Others get few. More trades = more fees.
WETH/USDC is the most traded pair on Base. That is why it is a popular choice for liquidity providers.
Snuggle shows you the trading volume and fee data for each pool so you can compare.
What You Learned
- A liquidity pool is a shared pot of two tokens for trading
- Traders pay fees. You earn a share based on how much you provide.
- Higher trading volume means more fees for you