What Is Liquidity Pool?

A liquidity pool is a smart contract containing equal values of two tokens (like ETH/USDC) that allows anyone to trade between them while paying a small fee. Instead of traditional order books, pools use an Automated Market Maker (AMM) formula to determine prices based on the ratio of tokens in the pool.

Why Liquidity Pools Matter for Airdrop Farming

Liquidity pools are central to airdrop farming because many protocols reward liquidity providers directly. When Uniswap airdropped UNI tokens in 2020, historical liquidity providers were major beneficiaries. Similarly, Arbitrum's airdrop heavily weighted users who had provided liquidity on Arbitrum-based DEXs. By depositing capital into liquidity pools early on a new protocol, you improve your odds of receiving retroactive airdrops while earning trading fees simultaneously.

Practical Mechanics

When you deposit tokens into a pool on Uniswap or Hyperliquid, you receive LP tokens representing your share of the pool. These tokens generate yield from trading fees (typically 0.01%-1% per swap). This dual incentive—fees plus airdrop potential—makes liquidity pools a primary hunting ground for yield farmers.

Example: In 2023, providing liquidity on Jito's MEV-Share pools on Solana qualified users for potential future airdrops while generating MEV rewards. Early Arbitrum liquidity providers earned both trading fees and later received ARB tokens based on their historical pool participation.

The Risks

Providing liquidity carries impermanent loss risk—if token prices diverge significantly, you could lose money even after earning fees. This is why successful airdrop farmers carefully choose which pools to supply, prioritizing stable pairs or pools on protocols likely to airdrop. Understanding pool composition, TVL, and protocol fundamentals separates strategic farmers from reckless ones.