All terms
Someone who deposits a pair of assets into a pool so others can trade against it.
A liquidity provider deposits two assets into an automated market maker pool and receives a share of the trading fees in return. LP is used for both the person and the act. Their deposit is what makes a token tradeable at all.
Providing liquidity is not free yield. The pool automatically sells whichever asset is rising and buys whichever is falling, which means an LP can end up worse off than simply holding. That gap is impermanent loss, and on a volatile pair it is frequently larger than the fees earned.
Whether the liquidity in a pool is locked or can be withdrawn by whoever deposited it is one of the most important things to check about any small token.
Depositing equal values of SOL and a token into a pool, earning a share of every swap, and being exposed to the ratio between them changing.
That providing liquidity is passive income. You are taking a position that is short volatility and long fees, and it loses to simply holding whenever the pair diverges enough. It is a trade with a view, not a savings account.
Common questions
Is being an LP passive income?
How do I know if being an LP was worth it?
Where to go next
More defi terms
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