Brief info on how liquidity Pool (LP) works

An operational crypto liquidity pool must be designed in a way that incentivizes crypto liquidity providers to stake their assets in a pool. That’s why most liquidity providers [earn trading fees and crypto rewards] from the exchanges upon which they pool tokens. When a user supplies a pool with liquidity, the provider is often rewarded with [liquidity provider (LP) tokens]. LP tokens can be valuable assets in their own right, and can be used throughout the DeFi ecosystem in various capacities.

Usually, a crypto liquidity provider receives LP tokens in proportion to the amount of liquidity they have supplied to the pool. When a pool facilitates a trade, a fractional fee is proportionally distributed amongst the LP token holders. For the liquidity provider to get back the liquidity they contributed (in addition to accrued fees from their portion), their LP tokens must be destroyed.

Liquidity pools maintain fair market values for the tokens they hold thanks to AMM algorithms, which maintain the price of tokens relative to one another within any particular pool. Liquidity pools in different protocols may use algorithms that differ slightly. For example: Uniswap liquidity pools use a [constant product formula] to maintain price ratios, and many DEX platforms utilize a similar model. This algorithm helps ensure that a pool consistently provides crypto market liquidity by managing the cost and ratio of the corresponding tokens as the demanded quantity increases.