Provide liquidity


Providing liquidity refers to the act of depositing assets into a liquidity pool, which is a collection of funds locked in a smart contract used to facilitate trading by providing liquidity on decentralized exchanges (DEXs). These pools allow users to trade cryptocurrencies without the need for traditional market makers, as the liquidity (i.e., the available funds for trading) comes from the assets pooled by the liquidity providers. In essence, when you provide liquidity, you are lending your cryptocurrency to a pool to enable others to trade with it, while the pool relies on algorithms to determine prices based on supply and demand.


The primary motivation for providing liquidity is to earn passive income on your cryptocurrency holdings. When you contribute your assets to a liquidity pool, you receive a portion of the trading fees generated from the trades that happen in that pool, proportional to your share of the pool's total assets. This incentive structure encourages individuals to lock their assets in the pool, thus increasing the pool's capacity to facilitate trades. It's an attractive option for those looking to make their cryptocurrency work for them beyond just appreciating in value over time.


While providing liquidity can be lucrative, it's not without its risks. One of the main risks is impermanent loss, which occurs when the price of your deposited assets changes compared to when you deposited them. This risk arises because the assets in a liquidity pool are constantly rebalanced to maintain their relative values, and significant price movements can lead to a situation where the dollar value of your share of the pool is less than if you had simply held your assets outside the pool. Additionally, there's the risk of smart contract vulnerabilities, which could lead to the loss of your deposited assets if exploited.


The rewards of providing liquidity can be significant. In addition to earning a share of the trading fees, liquidity providers often receive liquidity pool tokens (LPTs) that represent their share of the pool and can be used for further investment or staking opportunities. Moreover, some protocols offer additional incentives in the form of their native tokens to encourage liquidity provision, which can further enhance the profitability of becoming a liquidity provider. These rewards can offer a compelling way to generate passive income while participating actively in the decentralized finance (DeFi) ecosystem.

Related projects

Euler Finance

### What Euler is a non-custodial permissionless protocol on Ethereum that allows users to lend and borrow almost any crypto asset. Euler helps users to earn interest on their crypto assets or hedge against volatile markets without the need for a trusted third-party. ### Why? Euler introduces a number of new features in DeFi, including permissionless lending markets, protected collateral, reactive interest rates, per-second compounding interests and feeless flash loans. #### Permisionless listing Euler lets its users determine which assets are listed. Any asset that has a WETH pair on Uniswap v3 can be added as a lending market on Euler. #### Protected Collateral On Compound and Aave, collateral deposited to the protocol is always made available for lending. On the other hand, Euler allows collateral to be deposited, but not made available for lending. This collateral is 'protected'. It doesn't earn interest, but is free from the risks of borrowers defaulting, can always be withdrawn instantly, and helps protect against borrowers using tokens to influence governance decisions. #### Reactive interest rates Euler uses control theory to autonomously change the interest rates towards a level that maximises utilisation of assets in the protocol. These reactive interest rates adapt to market conditions for the asset in real-time without the need for ongoing governance intervention. #### Compound Interest Compound interest is accrued on Euler each second. This is different from other lending protocols, where interest is typically accrued every block. Earning interest per-second is generally expected to perform more predictably in the long-run, even if upgrades to Ethereum lead to changes in the average time between blocks. #### Feeless Flash Loans Euler only charges fees according to the time value of money, and from the blockchain's perspective flash loans are held for a duration of 0 seconds. Thus, they are entirely free on Euler (ignoring gas costs).