What is a Liquidity Provider (LP)?

What is a Liquidity Provider (LP)?

By Zied Chaabane | Fintropy | 14 Oct 2021


By definition, a liquidity provider is a market broker or organization acting as a market manufacturer in a specified asset class.

Stockbrokers have liquidity providers that undertake to supply liquidity in a specific stock. The provider of liquidity operates at both ends of monetary transactions. At specific prices, he sells and acquires a particular asset. It indicates he makes the market.

Now that the Decentralized Finance is established with the AMM LP (x * y = k) model, everyone may become an AMM liquidity provider. Liquidity is no longer concentrated to a particular entity, which means everyone may profit from a specific group’s rewards by supplying liquidity.

Several liquidity pools are not explicitly intended to construct trade pairs (AMM model) such as insurance agreements, tranches, security ponds, etc. In the broadest sense, providing liquidity places value inside an intelligent contract (i.e. providing liquidity).

AMM Liquidity Provision is the most often used kind of liquidity in the crypto sector. The AMM protocol performs a market breaking function in total autonomy, requiring just liquidity in the LP pool.

How do you obtain LP tokens?

A matching quantity of LP tokens will be received when the user deposits his value in a liquidity pool. These tokens can be interpreted as evidence of value being deposited in the liquidity pool.

How do LP Rewards in Fintropy Work?

Fintropy LP rewards decentralize asset management. ERC-20 synthetic tokens are now the focus. Initiate your portfolio with FINT tokens on our platform and set up the infrastructure underlying the tokens.

Buy tokens and stop worrying about missing investing possibilities by selecting from various cryptocurrencies, tokenized equities, and NFT shares. Invest in a new ETF or token in a matter of seconds and see your assets rise together with Fintropy.

What are the risks with AMM Liquidity Providing?

Impermanent loss is the main danger with AMM liquidity pools.

The permanent loss comes from a price difference between the assets you placed and when you deposited them — the more significant the disparity, the greater the potential Loss.

AMMs operate — within a particular trade pair, they always retain an equal value ratio of the two assets (in this example, STAK/ETH). If ETH has a rise in value, it will modify your position in STAK to keep the same ratio, and you can get an even more significant number of STAK tokens and a lesser quantity of ETH if you withdraw the position.

The temporary loss is erased if the value of the liquidity tokens recovers to its original value.

Impermanent losses are controlled by trade charges for users who utilize the pair to swap. If a protocol offers its cash suppliers rewards, these awards will also mitigate any temporary losses.

Final Thoughts

In the broadest sense, providing liquidity places value inside an intelligent contract (i.e. providing liquidity). The AMM protocol performs a market breaking function in total autonomy, requiring just liquidity in the LP pool. The Fintropy LP reward system decentralizes asset management. ERC-20 Synthetic Tokens are now the focus. AMMs operate within a particular trade fair, and they always retain an equal value ratio of the two assets . The impermanent loss comes from a price difference between the assets you placed and when you deposited them, and becomes “permanent” loss upon withdrawal.

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Zied Chaabane
Zied Chaabane

An Executive MBA Holder, a bachelor’s degree in finance and the Co-Founder of YalaCoins, Zied spent all his time advocating for Bitcoin. He created awareness and trained people in the MENA Region to know more about cryptocurrencies. Zied is a professional


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