What is Liquidity pool?
A liquidity pool is a smart contract holding two or more assets that traders swap against. Depositors earn a share of trading fees and take on the pool’s price exposure.
In practice
Supplying liquidity is not passive income. If the pooled assets diverge in price, a provider can end up worse off than simply holding them, an outcome usually called impermanent loss. Fee income has to outrun that gap for the position to make sense.