Liquidity provider (LP)

Decentralised exchanges built on automated market makers have no traditional market makers quoting prices. Instead, liquidity providers deposit pairs of tokens into pools, and traders swap against those reserves. In return, LPs receive a proportional share of the trading fees, tracked by a pool token or, in concentrated liquidity designs, by an NFT representing their position.

LPs are the supply side of DeFi trading. Anyone can become one, from retail users adding a few hundred dollars to professional firms managing large concentrated positions across Uniswap, Curve, Aerodrome or Raydium. Protocols often add token incentives to attract LPs to new pools, which is the origin of liquidity mining.

Providing liquidity is not passive income without risk. When prices move, the pool automatically sells the rising token and buys the falling one, producing impermanent loss that fees may not cover. Arbitrageurs extract value from stale prices, concentrated positions can fall out of range and stop earning, and the pool contract or the tokens themselves can fail.