The "liquidity pool" and AMM in DeFi are not that difficult

Do you want to close the page when you see "DeFi, liquidity pool, AMM"? Let me explain it in simple terms.

In traditional finance:

When you buy or sell stocks, you need to match buyers and sellers.

If there are no orders, you can't complete the transaction.

In many DeFi protocols, a different logic is used: AMM (Automated Market Maker) + liquidity pool.

You can think of it as:

A pool of tokens (fund pool) just sitting there,

Anyone can directly swap tokens with this pool,

The price is automatically calculated by a formula based on the ratio of the two tokens in the pool.

Those who provide funds to this pool are called LP (liquidity providers):

They deposit two types of tokens in proportion,

Helping others by providing the convenience of "instant swaps"

In return, they earn a portion of the transaction fees.

It looks like "making a market for others and earning fees," but don't forget:

When token prices are volatile, there is a risk of impermanent loss.

It’s not just "depositing and earning risk-free."

So here's a summary for beginners:

First understand the risks, then decide whether to become an LP,

Don't just focus on APR; very few people will explain the term "impermanent loss" to you.