Liquidity pool

A liquidity pool is a smart contract holding two or more tokens that traders swap against on a decentralised exchange. Users called liquidity providers (LPs) deposit tokens into the pool and receive LP tokens representing their share, which they can redeem later for their portion of the pool plus accumulated trading fees.

The main risk besides smart-contract bugs is impermanent loss. When the prices of the pooled tokens diverge, arbitrage rebalances the pool so that LPs end up with more of the token that fell and less of the one that rose. Compared with simply holding the tokens, this can be a loss, and it becomes permanent if you withdraw at that point. Fees may or may not compensate.

Pools of new tokens can be drained if the creator controls most of the liquidity and withdraws it, which is a classic rug pull.