What is a Liquidity Provider?

The decentralized finance (DeFi) sector has increased its activity and popularity in the past years. This is due to the existence of various DEXs or innovative blockchain-based applications that provide crypto investors with an alternative method of exchanging their cryptocurrencies. Today, more than $100 billion worth of cryptocurrency is locked away in decentralized finance protocols.

One of the financial activities that take place in the DeFi environment is associated with liquidity providers. What are liquidity providers?

In the field of finance, FIA, a leading global trade organization, interpreted liquidity provider as a financial intermediary that sends market orders at prices that reflect available information about asset prices, including the risk associated with transacting and holding that asset. The role of liquidity providers is to make it easier for buyers and sellers to exchange securities and other financial instruments by offering a pool of shares that they can do without finding and dealing with other individual traders.

In decentralized finance, the role of liquidity providers is crucial as they provide liquidity by connecting buyers and sellers across time and enable supply to meet demand promptly. CoinMarketCap defined a liquidity provider as decentralized exchange users who contribute tokens to a liquidity pool. Specifically, liquidity providers are investors who stake their cryptocurrency tokens on decentralized exchanges (DEXs) to gain transaction fees. In liquidity provision, users will lend their cryptocurrency assets to the DEX platform for other users to trade. Lenders receive interest and liquidity provider tokens (LPTs), granting access to exclusive benefits.

Liquidity providers serve as the key mechanism to the operation and functioning of the automated market maker (AMM). Liquidity pools are leveraged by decentralized exchanges that employ AMM-based systems to enable low-slippage trading of illiquid trading pairs. Rather than relying on standard order book-based trading systems, such exchanges execute trades utilizing funds stored for each asset in each trading pair. The amount paid to liquidity providers is proportional to the percentage of the liquidity pool they supply. When funding the pool, they are typically required to support two distinct assets to enable traders to trade them in pairs.

As one DEX player of the DeFi marketplace, Coinswap Space utilizes the AMM model that enables permissionless and automated trading of digital assets. Since the Coinswap Space platform is an automated market maker that leverages smart routing, it can build new pools. The swap receives liquidity from Liquidity Providers (“LPs”) who stake their tokens in “Pools.” They receive CS-LP (CoinSwap-Liquidity Provider) tokens in exchange for this, which can also be staked to earn CSS tokens in the “farm.” Within the CSS ecosystem, there are two tokens. Users will receive CSS-LP tokens for contributing to the CSS liquidity pools. After that, CSS-LP tokens can be staked in any of CoinSwap’s multiple yield farming pools.

Experience to receive incentives in exchange for your support of the AMM model. Be a liquidity provider at Coinswap Space.

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