What is a liquidity pool? How swaps work without a middleman, explained simply

Who is on the other side of your trade?

On a stock exchange, a buyer meets a seller. Many Solana exchanges, including Raydium and Meteora, work differently: you trade against a liquidity pool, a shared pot of two tokens, such as SOL and USDC, that anyone can add to.^[1] You put one token in and take the other out, in one step, with no one to wait for. That is why you can swap at any hour.

How a pool sets the price

A standard pool, which Raydium calls a CPMM pool, follows one rule: multiply the amounts of the two tokens in the pot, and the result must stay the same after every trade. Maths teachers write it x · y = k.^[1] When you take one token out, the other has to go up, so the price moves against you as you trade.

Here is a worked example with round, illustrative numbers and no fees. A pool holds 100 SOL and 10,000 USDC, so k is 1,000,000 and the price is 100 USDC per SOL.

The bigger trade got a price about 9% worse, because it used up a larger share of the pot. That gap is called price impact. It is why small pools are expensive to trade in, and why swap apps show it before you sign.

If a pool's price drifts away from the price elsewhere, traders spot the gap, buy the cheap side and sell the dear one, and their trades pull the pool back into line. Nobody sets the price by hand.

Who earns the fees

Every swap pays the pool a fee, set when the pool was created. On Raydium's standard and concentrated pools, 84% of it goes to the people who supplied the tokens, called liquidity providers, 12% buys back RAY and 4% goes to Raydium's treasury.^[2] Where your money goes when you swap shows every fee in one place.

Two kinds of pool on Raydium

Concentrated pools put the same money to work more efficiently, but only while the price stays in range.^[3] Their positions are NFTs, while standard pools give you ordinary LP tokens.^[4] Meteora offers concentrated pools of its own, where liquidity sits in price bins: see what DLMM is.

Adding liquidity, step by step

You do not need to add liquidity to swap. But if you want to earn a share of a pool's fees, this is how it works on a standard Raydium pool:

1. 01

   Check the pool first

   Open the pool's page on raydium.io and look at its size, its fee and whether both tokens are the ones you expect. Compare each token's contract address with the project's official site.

2. 02

   Click Add liquidity

   Raydium opens a form for the pool.^[4]

3. 03

   Enter one amount

   Type how much of one token you want to add. The other amount fills in at the pool's current ratio.

4. 04

   Review your share

   Raydium shows the LP tokens you will receive and your expected share of the pool.

5. 05

   Confirm in your wallet

   Approve in Raydium, then in your wallet. Start with an amount you would be fine losing.

6. 06

   Take it out later

   Open your position and click Remove liquidity to get both tokens back, at whatever ratio the pool then holds.

The risks, in plain words

• Impermanent loss. If the two tokens' prices move apart, what you can take out may be worth less than if you had simply kept them. StonkBuilder Learn explains impermanent loss ↗, and our Meteora guide covers it for Meteora's pools.
• Bad tokens. Anyone can create a pool with a copy of a famous token, or with a token that will fall to zero. A pool is only as good as the tokens in it.
• Smart-contract risk. Pools are code, and code can have bugs or be attacked, even at long-running platforms.
• Transfer fees. Some Token-2022 tokens charge a fee on every transfer, which changes what a deposit or a swap really delivers. Raydium's app accounts for the supported ones when you deposit.^[4]
• Very high yields. A very high advertised return usually means a very high risk.