What Is Liquidity provision?

Liquidity provision is the act of depositing assets into a liquidity pool, typically on an AMM-based decentralised exchange, to facilitate trading and earn swap fees. When users provide liquidity, they receive LP tokens representing their share of the pool and become exposed to impermanent loss if the deposited asset prices diverge. Liquidity provision is a passive strategy that allows anyone to participate in market making and earn trading fees without specialised infrastructure. Advanced forms include concentrated liquidity provision, where capital is deployed within specific price ranges for greater efficiency.

See also

• Liquidity provider

• Liquidity pool

• AMM

• CLMM

• Swap fee

• Market making

• Impermanent loss

• Delta neutral