A liquidity provider is a person or entity who loans assets to a platform to enhance trading and decentralization in crypto markets. Liquidity providers are often called market makers in most financial markets. To understand the concept of liquidity providers and how they operate, just see them as investors that help with liquidity in an exchange or a dApp.
In cryptocurrency, liquidity providers were made popular by decentralized applications. Liquidity is essential in crypto trading as it helps to keep markets stable and avoid slippage. Liquidity providers earn a passive income from locking their crypto assets with an exchange or platform.
The assets are being placed in liquidity pools in pairs for a certain amount of time in the Ddecentralized Exchange (DEX.) Commission earned on trading will be split between the exchange and the liquidity providers. Liquidity is now a huge factor in determining which platform users choose. As a result, platforms are creating and expanding liquidity provision programs to boost liquidity around their platform.