What is Liquidity Provider (LP)?

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Accepted Answer

A Liquidity Provider (LP) is a participant in a decentralized finance (DeFi) protocol, typically an Automated Market Maker (AMM), who deposits a pair of digital assets into a liquidity pool to facilitate trading and earn a share of the transaction fees generated by the pool. LPs are the backbone of decentralized exchanges, enabling the instant, permissionless swapping of tokens without the need for a traditional order book.

Liquidity Provider (LP)

What is Liquidity Provider (LP)?

How do Liquidity Providers (LPs) generate revenue and what are the primary sources of their yield in decentralized finance?

What is Impermanent Loss and what are the other major risks Liquidity Providers must consider when staking assets?

How does a user become a Liquidity Provider and what are the steps involved in depositing and withdrawing assets from a liquidity pool?

What is the critical role of Liquidity Providers in the broader Decentralized Finance (DeFi) ecosystem and how do they impact market efficiency?

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