Individuals or professional market participants who use their crypto assets to provide liquidity to a liquidity pool in order for the underlying DeFi protocol to function are known as liquidity providers (LPs).

Through the use of automated market makers, decentralized trading pools enable any individual to be a liquidity provider in the financial market (AMMs).

Liquidity providers, for example, fund a smart contract with two or more cryptocurrencies in an equal proportion on a decentralized exchange. This creates a market to facilitate trading activities for that cryptocurrency pair.

Liquidity providers are incentivized to provide liquidity because they are paid a percentage of the exchange's transaction fees. The rewards they receive are proportional to the amount of liquidity they contribute to the pool.

A liquidity provider is an entity, typically a financial institution or market participant, that facilitates trading in financial markets by offering to buy or sell assets, ensuring market liquidity. They play a crucial role in maintaining smooth market operations, enabling traders to execute transactions quickly and at fair prices.

In forex and stock markets, liquidity providers include banks, hedge funds, and specialized firms. They act as market makers, setting bid and ask prices and profiting from the spread. Their activity reduces price volatility and narrows bid-ask spreads, improving trading conditions.

Retail traders often indirectly interact with liquidity providers through brokers. Without them, markets would suffer from illiquidity, leading to wider spreads, slower execution, and higher trading costs.