Liquidity Pool

A liquidity provider is a user who funds a liquidity pool with crypto assets he/she owns to facilitate trading on the platform and earn passive income on his/her deposit.

While trading illiquid trading pairs on order book-based exchanges could lead to suffering from great slippage and the inability to execute trades, the advantage of liquidity providers is that trades can always be executed as long as the liquidity pools are big enough. For this reason, liquidity providers are seen as trade facilitators and paid with the transaction fees paid for the trades that they enabled.

How much liquidity providers are paid is based on the percentage of the liquidity pool that they provide. When funding the pool, they are usually required to fund two different assets to enable traders to switch between one to the other by trading them in pairs.

Automated Market Maker Swap (eg. Uniswap protocol) incentivizes users to add liquidity to trading pools by rewarding providers with the fees generated when other users trade with those pools.

Unlike traditional finance, almost anyone can act as an LP. You don't need to start out with millions, but rather deposit small accounts and slowly make bigger profits.

Although funds are locked when you deposit them in the smart contract, they can be withdrawn anytime. If you don't want to continue providing liquidity for a certain pair, you can take it back.