Liquidity pools and AMMs in DeFi aren't that hard

Seeing "DeFi, liquidity pools, AMM" makes you want to close the page? Come, let me explain in simple terms.

In traditional finance:

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

When no one is placing orders, you can't complete the transaction.

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

You can think of it as:

A pool of tokens (capital pool) always sitting there,

Anyone can directly exchange tokens with this pool,

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

Those who provide funds in this pool are called LPs (Liquidity Providers):

They deposit two types of tokens in proportion

To provide others with the convenience of "instant exchange"

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

It looks like "helping others trade to earn fees," but don't forget:

When the price of tokens fluctuates significantly, there is a risk of impermanent loss.

It's not "just put it in and wait for risk-free profits."

So, a summary for beginners in one sentence:

First, understand the risks before deciding whether to be an LP,

Don't just look at the APR; very few people will explain the four words "impermanent loss" in detail.