Liquidity Provider
User who deposits cryptocurrency into liquidity pools to earn trading fees and provide DEX liquidity.
Last Updated
2026-03-29
What is Liquidity Provider?
A liquidity provider (LP) is a user who deposits equal values of two cryptocurrencies into a liquidity pool and receives LP tokens representing their share. LPs enable DEX trading by funding the pools that traders swap against.
How does Liquidity Provider work?
- Deposit equal USD values of two tokens into a pool (e.g.,
$10,000ETH +$10,000USDC). - Receive LP tokens representing your share
2%if you deposit$20,000into a$1Mpool. - Earn
2%of all trading fees generated in that pool. - Withdraw anytime by burning LP tokens to reclaim your share plus accumulated fees.
Why does Liquidity Provider matter?
Without LPs there is no liquidity for DEX traders to swap against. LPs earn yield on idle capital without giving up custody.
Key features of Liquidity Provider
- Earn a percentage of every swap in your pool
- Subject to impermanent loss if token prices diverge
- Can exit anytime by burning LP tokens
- Many pools offer additional governance token rewards
Examples of Liquidity Provider
An LP deposits 10 ETH + $20,000 USDC into a Uniswap pool. After a month they earn $200 in fees, but ETH dropping 20% causes $2,000 in impermanent loss.
SushiSwap rewards LPs with SUSHI tokens on top of trading fees. Uniswap V3 lets LPs concentrate liquidity in specific price ranges to earn higher fees.