Liquidity pools are critical to the function of AMM-based DEXs like the SundaeSwap DEX, where trades (swaps) don’t happen between two parties, but between an individual party and the liquidity pool that hold the tokens the individual wishes to trade.

Individuals who deposit tokens into a liquidity pool are called liquidity providers. When you deposit tokens into a liquidity pool, you receive LP tokens in return (as a kind of “receipt” for your deposit). Those LP tokens represent your fractional “ownership” of the pool — the share of tokens that you have contributed to the total pool. Because funding these pools is critical to a DEX’s success, you are rewarded for your deposits by collecting a small fee on every swap (transaction) that takes place using the liquidity pools you fund.

If you would like more information on what a liquidity pool is, please feel free to check out the video featured below.