A liquidity pool is a smart-contract vault that holds a pair of tokens and lets users swap between them without an order book. Anyone can provide liquidity to the pool, and anyone can swap through it. The pool itself sets the price algorithmically based on the ratio of the two tokens inside.
What are LP tokens?
When you provide liquidity, you receive LP tokens as a record of your share. These tokens are your "receipt" — they represent your portion of the pool and can be redeemed for the underlying assets at any time. As swaps happen and fees accumulate in the pool, the value of your LP tokens accrues accordingly.
How a pool accrues fees
Every swap through the pool charges a small fee (typically 0.2%, though it varies by pool). Those fees stay in the pool and are distributed proportionally to all liquidity providers — which is why the value of your LP tokens accrues over time.
Because the protocol is non-custodial, anyone can add liquidity and receive a share of the swap fees. Pools grow or shrink based on user activity.