Definition
A liquidity provider (LP) supplies assets that other market participants can trade or borrow. In DeFi, the term commonly means a depositor in a smart-contract liquidity pool rather than a firm quoting prices through an order book.
How It Works
An LP deposits the required assets and receives a record of the position, such as pool tokens or an NFT. Fees may accrue when trades use that liquidity. In concentrated-liquidity designs, the provider chooses a price interval; the position stops earning swap fees while the market price is outside that interval.
Key Considerations
Providing liquidity is an inventory exposure, not simply collecting interest. The asset mix changes as traders interact with the pool, and fees may not offset losses relative to holding the assets separately. Withdrawals return the position’s current entitlement, not necessarily the original quantities. Contract rules, fee tiers and withdrawal restrictions differ across protocols.