Liquidity Pool

A liquidity pool holds two (or more) paired tokens locked in a smart contract and uses an automated market-maker algorithm to price trades between them. Users who add tokens to a pool become liquidity providers and earn trading fees. In return, they hold LP tokens representing their share of the pool.

Liquidity pools are central to DeFi rug pulls because the pool is where investor value sits. When developers drain a pool (removing all token-pair liquidity at once), the token price collapses to near zero in seconds and there is no liquidity for anyone else to sell into. The LP tokens they hold as project operators are redeemed in one transaction.

For consumers evaluating a project, the key metrics to check are total liquidity locked (and for how long), who controls the liquidity, and whether the liquidity lock is with a reputable third-party locker rather than a developer-controlled address.