What Is A Liquidity Provider (LP)?
A liquidity provider (LP) is a user who funds a liquidity pool. An LP will use their own cryptocurrencies and deposit them within the smart contract associated with the liquidity pool, in return for getting paid interest for their deposit.
Decentralized finance (DeFi) protocols rely on individuals to provide liquidity to a decentralized application (dApp), this is in contrast to traditional markets where huge centralized entities act as market makers (liquidity providers). There is no barrier to entry when becoming an LP, once you deposit into a liquidity pool, you become an LP.
Liquidity providers are paid passively based on the size of their deposits within the liquidity pool through a portion of the transaction fees generated through the platform they’ve deposited their cryptocurrency on.