Liquidity Provider
Someone who deposits token pairs into a pool, supplying the funds traders swap against in return for a share of fees.
A liquidity provider, or LP, funds a pool. Deposit equal values of two tokens, ETH and USDC for instance, and you receive LP tokens representing your share. Every trade against that pool pays a small fee, typically 0.3%, split among the providers.
It can look like passive income, but it is not free money. If the two token prices diverge, you can suffer impermanent loss and end up behind a simple buy-and-hold. Providers in volatile pairs sometimes earn fees yet still lose value overall.
Related terms
A pot of tokens locked in a smart contract that traders swap against, with prices set by a formula.
Automated Market Maker (AMM)A pricing algorithm that lets a token pool quote and settle trades automatically, replacing the traditional order book of buyers and sellers.
Impermanent LossThe gap between leaving tokens in a liquidity pool and simply holding them, caused when the pooled prices drift apart.
Yield FarmingChasing the highest returns by moving crypto between DeFi protocols to earn trading fees and bonus token rewards.