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Crypto Terms:  Letter L

What is Liquidity Provider?

Meaning:
Liquidity Provider - a user who funds liquidity pools with their personal assets.
easy
2 minutes

Let's find out Liquidity Provider meaning, definition in crypto, what is Liquidity Provider, and all other detailed facts.

Liquidity providers are decentralized exchange users who fund a liquidity pool with tokens they possess. They do this to facilitate trading on the platform to earn passive income on their deposits.

A liquidity provider, for example, may supply a liquidity pool containing $8,000 worth of Ether and $8,000 worth of USD-pegged decentralized stablecoin DAI to facilitate the trading that takes place between the two. As a result, each time a trade on the ETH/DAI is made, the liquidity provider gets compensated for funding the pool in question.

So, the percentage of the liquidity pool they provide determines how much they will get paid. Typically, they are obligated to fund two separate assets when funding the pool, to allow traders to change between one another by trading them in pairs.

Decentralized exchanges employ automated market maker-based systems to facilitate the trading of illiquid trading pairs with minimal downtime leveraging liquidity pools. Rather than typical order book-based trading platforms, such exchanges employ money for each asset in each trading pair to permit deals to be performed.

Although trading illiquid trading pairs on order book-based exchanges may result in significant dislocation and failure to finish transactions, liquidity providers' benefit is that trades may always be performed as long as the liquidity pools are large enough. As a result, liquidity providers are regarded as trade enhancers and are compensated through service fees charged from their facilitated trades.

liquidity pool<\/strong><\/a> since the amount of owned LP tokens corresponds to the liquidity share in the overall pool. They&rsquo;re given to liquidity providers on <a href=https://www.bitdegree.org/"//crypto//best-decentralized-exchange/">decentralized exchanges (DEXs)<\/strong><\/a>.<\/p>\n<p>DEXs that issue LP tokens to liquidity providers include <strong>Uniswap, PancakeSwap, and Sushi<\/strong>.&nbsp;<\/p>\n<p>In the most basic terms, <strong>LP tokens are very similar to tokens on the same network<\/strong>. For instance, Uniswap and Sushi operate on the Ethereum network. Therefore, LP tokens issued by these DEXs are considered to be <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-erc-20/">ERC-20 tokens. Consequently, they can be transferred, traded, and staked on other protocols just like a regular ERC-20 token.<\/p>\n<p><strong>LP token holders have control over their locked liquidity<\/strong>, therefore, they can redeem LP tokens from the liquidity pools whenever they wish to do so. However, if they redeem them too early, they might face small penalties.<\/p>\n<p>As mentioned above, LP tokens and the share in the overall liquidity pool are proportionate. This fact is utilized to find out:<\/p>\n<ul>\n<li>The <strong>transaction fees&rsquo; share<\/strong> accumulated throughout a liquidity provision per one liquidity provider;<\/li>\n<li>The <strong>percentage of liquidity<\/strong> when liquidity providers redeem their LP tokens.<\/li>\n<\/ul>\n<p>You can calculate the value of an LP token using this formula:<\/p>\n<p><em>Total Value of Liquidity Pool\/Circulating Supply of LP Tokens = Value of 1 LP Token<\/em><\/p>\n<p>In regards to DeFi&nbsp;platforms, more and more ways to use LP tokens are popping up.<\/p>\n<p>For example, <strong>LP tokens are also used for <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-yield-farming/">farming which is a way to maximize rewards by staking LP tokens. Additionally, LP tokens can be used to <strong>qualify its holder to participate in an <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-initial-dex-offering-ido/">initial DEX offering (IDO)<\/a><\/strong>. This is due to the fact that you must hold a certain amount of LP tokens that have a specific value in order to be eligible.<\/p>","definition":"tokens issued to liquidity providers on a DEX that represent the liquidity provider's share of a pool in question.","status":"published","meta_title":"What are Liquidity Provider Tokens (LP Tokens)? Definition & Meaning | Crypto Wiki","meta_description":"Liquidity Provider Tokens (LP Tokens) meaning: Liquidity Provider Tokens (LP Tokens) - tokens issued to liquidity providers on a DEX that represent the liquidity provider's share of a pool in question.","meta_keywords":null}" :prev-section="{"id":478,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Market_liquidity","level":"easy","author_id":1,"created_at":"2023-06-19T06:59:00.000000Z","updated_at":"2024-01-08T03:32:13.000000Z","slug":"what-is-liquidity-pool","title":"What is Liquidity Pool?","section":"L","keyword":"Liquidity Pool","content":"<p><strong>Liquidity pool<\/strong> refers to the pool of tokens that are locked in <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-smart-contract/">smart contracts<\/strong><\/a>. They are used on <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-decentralized-exchange-dex/">decentralized exchange platforms (DEXs)<\/strong><\/a> to provide liquidity and <strong>mitigate the illiquidity issues<\/strong> of such platforms.<\/p>\n<p>Liquidity pool can also describe the intersection of orders that create price levels which, after reaching a certain threshold, can see the asset decide whether to follow the trend upward or downward.<\/p>\n<p>DEXs that leverage liquidity pools typically also rely on <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-automated-market-maker-amm/">automated market maker systems<\/strong><\/a>. Such trading platforms use <strong>pre-funded on-chain liquidity pools<\/strong> for the assets involved in trading pairs rather than utilizing the usual <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-order-book/">order books<\/strong><\/a>.<\/p>\n<p>By using liquidity pools, exchange platforms do not require the traders to decide on a given trading price for the assets. Instead, the platforms leverage the liquidity pool with the locked-in assets. Trades can occur with limited <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-slippage/">slippage regardless of the illiquidity levels of the trading pairs as long as the liquidity pool has sufficient funds.<\/p>\n<p>Users providing the funds for liquidity pools can earn a passive income on their deposits via trading fees. The income is calculated based on <strong>the percentage of their contribution to the liquidity pool<\/strong>. Tokens that confirm a user's contribution to a liquidity pool are called \"LP tokens\". Users can usually withdraw their assets from liquidity pools at any time, unless there's a lockup period.<\/p>\n<p>Bancor, an Ethereum-based trading platform, was among the first to implement liquidity pools for its trading. This system has since become widely used, particularly thanks to the popularity of the Uniswap exchange platform.<\/p>\n<p>Note that, in liquidity pools, price changes in paired tokens might lead to potential losses. This is called an \"<a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-impermanent-loss/">impermanent loss<\/strong><\/a>\". Potential factors that can influence these price changes range from supply &amp; demand, all the way to trading volume, external market prices, or even other users participating in arbitrage.<\/p>","definition":"a pool of tokens that are locked in smart contracts and facilitate the trading on decentralized exchanges.","status":"published","meta_title":"What is Liquidity Pool? Definition & Meaning | Crypto Wiki","meta_description":"Liquidity Pool meaning: Liquidity Pool - a pool of tokens that are locked in smart contracts and facilitate the trading on decentralized exchanges.","meta_keywords":null}" :model="{"id":472,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Market_maker","level":"easy","author_id":1,"created_at":"2023-06-19T06:59:00.000000Z","updated_at":"2024-01-08T03:36:44.000000Z","slug":"what-is-liquidity-provider","title":"What is Liquidity Provider?","section":"L","keyword":"Liquidity Provider","content":"<p>Liquidity providers are decentralized exchange users who <strong>fund a <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-liquidity-pool/">liquidity pool<\/a> with tokens they possess<\/strong>. They do this to facilitate trading on the platform to earn passive income on their deposits.<\/p>\n<p>A liquidity provider, for example, may supply a liquidity pool containing $8,000 worth of Ether and $8,000 worth of USD-pegged decentralized <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-stablecoin/">stablecoin DAI to facilitate the trading that takes place between the two.&nbsp;As a result, each time a trade on the ETH\/DAI is made, <strong>the liquidity provider gets compensated for funding the pool in question<\/strong>.<\/p>\n<p>So, the percentage of the liquidity pool they provide determines<strong>&nbsp;how much they will get paid<\/strong>. Typically, they are <strong>obligated to fund two separate assets when funding the pool<\/strong>, to allow traders to change between one another by trading them in pairs.<\/p>\n<p><a href=https://www.bitdegree.org/"//crypto//best-decentralized-exchange/">Decentralized <\/strong>exchanges<\/a> employ automated market maker-based systems to facilitate the trading of illiquid trading pairs with minimal downtime leveraging liquidity pools. Rather than typical&nbsp;order book-based trading platforms, such exchanges employ money for each asset in each trading pair to permit deals to be performed.<\/p>\n<p>Although trading illiquid trading pairs on order book-based exchanges may result in significant dislocation and failure to finish transactions, liquidity providers' benefit is that trades may always be performed as long as the liquidity pools are large enough.&nbsp;As a result, <strong>liquidity providers are regarded as trade enhancers<\/strong> and are compensated through service fees charged from their facilitated trades.<\/p>","definition":"a user who funds liquidity pools with their personal assets.","status":"published","meta_title":"What is Liquidity Provider? Definition & Meaning | Crypto Wiki","meta_description":"Liquidity Provider meaning: Liquidity Provider - a user who funds liquidity pools with their personal assets.","meta_keywords":null,"author":{"id":1,"user_id":1,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2023-05-11T07:18:20.000000Z","title":"Editor-In-Chief","slug":"aaron-s-editor-in-chief","description":"<p>Having completed a Master&rsquo;s degree on Economics, Politics &amp; Culture for the East Asia region, Aaron has written scientific papers with a comparative analysis of the differences between US&rsquo; Western and Japan&rsquo;s Collective forms of capitalism, 1945-2020.<\/p>\n<p>With close to a decade of experience in the FinTech industry, Aaron understands all of the biggest issues and struggles that crypto enthusiasts face. He&rsquo;s a passionate analyst who is concerned with data-driven and fact-based content, as well as that which speaks to both Web3 natives and industry newcomers.<\/p>\n<p>Aaron is the go-to person for everything and anything related to digital currencies. With a huge passion for blockchain &amp; Web3 education, Aaron strives to transform the space as we know it, and make it more approachable to complete beginners.<\/p>\n<p>Aaron has been quoted by multiple established outlets, and is a published author himself. Even during his free time, he enjoys researching the market trends, and looking for the next supernova.<\/p>","user":{"id":1,"first_name":"Aaron","last_name":"S.","email":"aaron@bitdegree.org","email_sanitized":"aaron@bitdegree.org","email_verified_at":"2023-12-01T09:40:20.000000Z","must_verify_email":false,"is_registered_with_wallet":false,"status":"active","country":"LT","last_connected_ip":"88.119.132.125","image_id":2641,"referral_token":"05TMu2NysXOCn525","referred_by":null,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2024-01-09T15:22:21.000000Z","full_name":"Aaron S."}}}" :chapter-list="[{"id":1,"title":"Blockchain","slug":"blockchain","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-blockchain.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/blockchain-101.jpg","rating":100,"sections":[{"chapter_id":1,"order":1,"slug":"what-is-blockchain","title":"What is the Blockchain?","status":"published","modified_content":null},{"chapter_id":1,"order":2,"slug":"decentralized-blockchain","title":"Anonymous & Decentralized Blockchains: The Cornerstone of Crypto","status":"published","modified_content":null},{"chapter_id":1,"order":3,"slug":"blockchain-transaction","title":"What is a Blockchain Transaction in Crypto?","status":"published","modified_content":null},{"chapter_id":1,"order":4,"slug":"crypto-fees","title":"The Different Types of Crypto Fees Explained","status":"published","modified_content":null},{"chapter_id":1,"order":5,"slug":"what-is-bridging-in-crypto","title":"The Key Notion Behind the Concept of Bridging in Crypto","status":"published","modified_content":null},{"chapter_id":1,"order":6,"slug":"types-of-blockchains","title":"Different Types of Blockchains: What to Look Out For?","status":"published","modified_content":null}]},{"id":2,"title":"Cryptocurrencies","slug":"cryptocurrencies","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-cryptocurrencies.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/cryptocurrencies-101.jpg","rating":100,"sections":[{"chapter_id":2,"order":1,"slug":"what-is-a-cryptocurrency","title":"What is a Cryptocurrency?","status":"published","modified_content":null},{"chapter_id":2,"order":2,"slug":"how-does-cryptocurrency-work","title":"How Does Cryptocurrency Work?","status":"published","modified_content":null},{"chapter_id":2,"order":3,"slug":"is-cryptocurrency-a-good-investment","title":"Is Cryptocurrency a Good Investment? 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Standards","status":"published","modified_content":null},{"chapter_id":3,"order":5,"slug":"how-to-buy-crypto","title":"From Fiat to Crypto: How to Buy Crypto for the First Time","status":"published","modified_content":null},{"chapter_id":3,"order":6,"slug":"fiat-to-crypto","title":"Taking Profits: Turning Crypto Into Fiat","status":"published","modified_content":null},{"chapter_id":3,"order":7,"slug":"how-to-use-crypto","title":"You\u2019ve Got Crypto: What Can You Do With It?","status":"published","modified_content":null}]},{"id":4,"title":"Crypto Wallets","slug":"crypto-wallets","updated":false,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-crypto-wallets.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/crypto-wallets-101.jpg","rating":80,"sections":[{"chapter_id":4,"order":1,"slug":"what-is-a-crypto-wallet","title":"What is a Crypto Wallet?","status":"published","modified_content":null},{"chapter_id":4,"order":2,"slug":"hot-wallet-vs-cold-wallet","title":"Hot Wallet VS Cold Wallet: Which One to Pick?","status":"published","modified_content":null},{"chapter_id":4,"order":3,"slug":"non-custodial-wallet","title":"What are Non-Custodial Crypto Wallets?","status":"published","modified_content":null},{"chapter_id":4,"order":4,"slug":"what-is-metamask","title":"Metamask: The Leading Non-Custodial Wallet","status":"published","modified_content":null},{"chapter_id":4,"order":37,"slug":"how-safe-is-cryptocurrency","title":"The Key Crypto Wallet Safety Practices: How Safe Can Crypto Be?","status":"published","modified_content":null}]},{"id":5,"title":"NFTs","slug":"nfts","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-nfts.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/nfts-101.jpg","rating":100,"sections":[{"chapter_id":5,"order":2,"slug":"how-to-trade-nfts","title":"NFT Trading: The Ins and Outs","status":"published","modified_content":null},{"chapter_id":5,"order":3,"slug":"buying-nft","title":"Tips and Tricks of Choosing the Right NFTs","status":"published","modified_content":null},{"chapter_id":5,"order":4,"slug":"how-to-store-nft","title":"How to Store NFTs: Best Practices","status":"published","modified_content":null},{"chapter_id":5,"order":5,"slug":"how-to-create-an-nft","title":"How to Create Your Own NFTs?","status":"published","modified_content":null},{"chapter_id":5,"order":6,"slug":"how-to-make-passive-money-with-nft","title":"Making Passive Money with NFTs","status":"published","modified_content":null}]},{"id":6,"title":"dApps & Defi","slug":"dapps-and-defi","updated":true,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-dapps.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/dapps-defi-101.jpg","rating":80,"sections":[{"chapter_id":6,"order":1,"slug":"what-are-nfts","title":"What are Non-Fungible Tokens (NFTs)?","status":"published","modified_content":null},{"chapter_id":6,"order":1,"slug":"what-is-defi","title":"What is Decentralized Finance (DeFi)?","status":"published","modified_content":null},{"chapter_id":6,"order":2,"slug":"what-is-defi-2-0","title":"DeFi 2.0: The New Version of Decentralized Finance","status":"published","modified_content":null},{"chapter_id":6,"order":3,"slug":"what-are-dapps-in-crypto","title":"What Are dApps and How Do They Work?","status":"published","modified_content":null},{"chapter_id":6,"order":4,"slug":"defi-dapps","title":"Picking the Right dApps: Dos and Don'ts","status":"published","modified_content":null},{"chapter_id":6,"order":5,"slug":"what-is-web-3-0","title":"Web 3.0: The Future of the Internet","status":"published","modified_content":null},{"chapter_id":6,"order":6,"slug":"what-are-smart-contracts","title":"What is the Core Purpose of Smart 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Cryptocurrencies?","status":"published","modified_content":null},{"chapter_id":7,"order":2,"slug":"how-to-invest-in-crypto","title":"Investing in Crypto: What Investing Options Do You Have?","status":"published","modified_content":null},{"chapter_id":7,"order":3,"slug":"ico-vs-ido","title":"ICO vs IDO vs IEO: Which One is the One?","status":"published","modified_content":null},{"chapter_id":7,"order":4,"slug":"what-is-an-airdrop","title":"What are Crypto Airdrops and How to Get Them?","status":"published","modified_content":null},{"chapter_id":7,"order":5,"slug":"how-to-get-free-crypto","title":"How to Get Free Crypto Assets?","status":"published","modified_content":null},{"chapter_id":7,"order":6,"slug":"how-to-arbitrage-crypto","title":"What is Crypto Arbitrage: The Main Principles","status":"published","modified_content":null},{"chapter_id":7,"order":7,"slug":"what-is-a-perpetual-contract","title":"Perpetual Contracts: Futures Contracts Without an Expiration Date","status":"published","modified_content":null},{"chapter_id":7,"order":8,"slug":"what-is-fud","title":"What is FUD: How to Use It to Your Advantage While Investing in Crypto?","status":"published","modified_content":null},{"chapter_id":7,"order":9,"slug":"investing-in-cryptocurrency","title":"Investing in Cryptocurrency: How to Manage Your Risks?","status":"published","modified_content":null},{"chapter_id":7,"order":10,"slug":"what-is-a-rug-pull-in-crypto","title":"What is a Rug Pull in Crypto?","status":"published","modified_content":null},{"chapter_id":7,"order":11,"slug":"how-to-avoid-rug-pulls-in-crypto","title":"How to Spot and Avoid Rug Pulls?","status":"published","modified_content":null},{"chapter_id":7,"order":12,"slug":"how-to-avoid-crypto-taxes","title":"The Key Legal Techniques of Avoiding Crypto Taxes","status":"published","modified_content":null}]},{"id":8,"title":"Crypto 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Mining?","status":"published","modified_content":null},{"chapter_id":9,"order":3,"slug":"what-is-staking-crypto","title":"An Advanced Look into What is Staking Crypto","status":"published","modified_content":null},{"chapter_id":9,"order":4,"slug":"what-is-proof-of-stake-vs-proof-of-work","title":"Proof-of-Work VS Proof-of-Stake: The Differences That Matter","status":"published","modified_content":null},{"chapter_id":9,"order":5,"slug":"what-is-crypto-mining-rig","title":"Crypto Mining Rig: What It is and How to Build One?","status":"published","modified_content":null}]},{"id":10,"title":"Crypto Terms","updated":false,"chapter":"crypto\/assets\/crypto-book\/chapters\/crypto-101-glossary.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/crypto-glossary-101.jpg","rating":100,"sections":["A","B","C","D","E","F","G","H","I","J","K","L","M","N","O","P","Q","R","S","T","U","V","W","X","Y","Z"]}]" current-chapter="L" current-section="what-is-liquidity-provider">