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’s explain it in simple terms.

In traditional finance:

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

If there are no orders, you can't make a 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 (capital pool) always lying there,

Anyone can directly exchange coins 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 LP (Liquidity Providers):

They deposit two types of coins in proportion

To help others provide the convenience of "instant exchange"

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

It looks like "helping others make a market to earn fees," but don’t forget:

When token prices fluctuate significantly, there is a risk of impermanent loss.

It’s not "just put it in and wait for risk-free earnings."

So here’s a one-sentence summary for beginners:

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

Don’t just look at APR; very few people explain the term "impermanent loss" in detail.