What Is Pool2?

The term became widespread during the 2020 yield farming wave. New projects usually offered a two-stage reward program: in the first pools, called 'Pool1', users earned the project's new token by depositing existing, established assets. In Pool2, users deposited the project's own token together with an asset like ETH into a liquidity pool on a decentralized exchange, staked the LP tokens they received, and were generally rewarded at higher rates.

Projects use Pool2 as a way to build on-chain liquidity for their own token. For example, someone providing liquidity to an XYZ/ETH pool both earns a share of trading fees and earns extra XYZ rewards. This creates the depth needed for the token to be bought and sold on decentralized exchanges.

Pool2 is generally where risk is most concentrated. Because rewards are paid in the project's own token, the token price can fall as rewards are sold, and an APY that looks high erodes quickly. Liquidity providers are also exposed to impermanent loss; if the token loses value, the value of their share in the pool can drop sharply. If the team withdraws its own liquidity, there is also a rug pull risk.