Understanding the basics of liquidity pools

Liquidity pools are smart contracts that hold one or more token reserves. Designed to serve as an automated market maker (AMM) for traders, Bancor liquidity pools offer a contrast to more conventional order-book exchanges in their simplicity and transparency.

As of the v2 update (July 2020), Bancor is introducing key new features that will address several of the major challenges facing liquidity providers (LPs) on AMMs. Mainly, v2 addresses:

  • Involuntary Token Exposure: that most AMMs require LPs to contribute liquidity to both assets in a pool, though they might only hold one

  • High Slippage: that the pricing formula leads to poor fills on larger trades

  • Impermanent Loss: that LPs are subject to value loss when the prices of pool assets diverge