> For the complete documentation index, see [llms.txt](https://swapmode.gitbook.io/swapmode/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://swapmode.gitbook.io/swapmode/swapmode-1/liquidity-pools.md).

# Liquidity Pools

## What Are Liquidity Pools?

Liquidity Pools are collections of tokens that facilitate decentralized and permissionless trading. Users contribute an equal value of two tokens— a primary and a base token—to these pools. In return for their contribution, they receive Liquidity Provider (LP) tokens, like SwapMode's MLP tokens, representing their share in the pool. For example, depositing SMD and ETH yields SMD-ETH LP tokens, indicating ownership of a part of that pool's assets.

When new liquidity is added, the pool issues new liquidity tokens to the contributor's address, reflecting their share in the pool. The quantity of these tokens depends on their contributed proportion of the pool's total liquidity. For new pools, the initial number of liquidity tokens received is determined by the formula sqrt(x \* y), where x and y represent the amounts of the respective tokens contributed. These liquidity tokens can be redeemed, allowing contributors to withdraw their share of the pool's assets at any time.<br>


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