---
title: Liquidity Provider
description: Page on Vedang Vatsa's site: https://veda.ng/glossary/liquidity-provider
canonical: https://veda.ng/glossary/liquidity-provider
last_updated: 2026-10-03
type: text/markdown
---
# Liquidity Provider

Source: https://veda.ng/glossary/liquidity-provider
Author: Vedang Vatsa (https://veda.ng/about)

A liquidity provider, LP, deposits assets into pools or order books so others can trade. LPs earn fees on flow against their capital. In AMM pools they deposit pairs such as ETH and USDC and receive LP tokens for their share. When traders swap, a cut of each trade, often 0.3%, goes to the pool and is split by LP token holdings.

The risk is impermanent loss. When prices of the deposited assets diverge, the pool rebalances and LPs can finish worse than holding. On order books, market makers quote both sides, earn the spread, and manage inventory. Professional LPs run this across venues. Without LPs, spreads widen and trading gets worse. DeFi protocols compete for LP capital with farming rewards on top of fees to bootstrap depth. LPs earn fees from trades executed against their liquidity, the compensation for providing capital that enables market function. When traders swap, a portion of each trade (typically 0.3%) goes to the pool, distributed proportionally to LP token holders. In traditional order book markets, market makers provide liquidity by placing limit orders on both bid and ask sides, profiting from the spread while managing inventory risk. Professional LPs use advanced strategies to optimize returns and manage risks across multiple venues. An LP deposits into a pool and earns a share of swap fees. Impermanent loss is the main hidden cost.

Glossary index: https://veda.ng/glossary