Do you really know what a liquidity provider does?

In the crypto market, you may encounter a very common problem: you want to sell your coins but can't find buyers, or you want to buy at a certain price but the price suddenly slips. Who is behind this problem? The answer lies in the role of Liquidity Provider.

Who is a Liquidity Provider and what is its importance?

A liquidity provider is not an ordinary person—it is any entity or individual that injects capital into the market to ensure there are continuous buy and sell offers. It could be a professional market maker, a company specializing in high-frequency trading, or a major financial institution. Their role is simple yet vital: to provide buy and sell orders continuously, even during times of low demand.

Imagine a market without liquidity providers—a few sellers and buyers, huge gaps between prices, and massive slippage. This makes trading frustrating and inefficient. With liquidity providers, prices become relatively stable and execution smooth.

How does a liquidity provider work in decentralized trading platforms?

The emergence of decentralized trading platforms has changed the game. Instead of a central intermediary, users trade directly with each other. But this raises the question: who guarantees Liquidity?

The answer: Liquidity Pool. This is a capital pool provided by dozens or hundreds of liquidity providers together. The liquidity provider deposits their tokens into the pool and receives in return an LP token (, a token for liquidity providers ) as a proof of ownership.

How do they benefit? Every trade executed in the pool generates a fee—a small percentage of the value of the exchange. This fee is distributed to all liquidity providers in proportion to their share.

Mutual benefit

Traders get what they want: high liquidity and fast execution at fair prices. Liquidity providers earn passive income from fees. Without this balance, the crypto market cannot thrive.

But beware: the risks are very real

Here comes the dark side. The crypto market is wildly volatile. Prices dance up and down rapidly, and this means that liquidity providers may face impermanent loss huge.

For example: if you added tokens equally (50-50), and one of the tokens collapsed while the other jumped, you will end up with a worse wallet than if you simply held the original tokens. The fees may partially compensate you, but not always.

In addition, if the activity in the liquidity pool collapses suddenly, you may find yourself stuck with tokens that cannot be easily sold.

Summary

The liquidity provider plays an indispensable role in the crypto market—maintaining price stability and ensuring smooth execution of trades. However, this role comes with responsibility and real risks. Before you decide to become a liquidity provider, think carefully about market volatility and potential losses.