What is a liquidity provider? Back to list

Member SinceJul 08, 2021

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Oct 31, 2022 a 15:21
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.

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