Some of us have been hearing liquidity providers, but do not really understand how it works. It's a very simple set up that came up as a result of many projects having small market caps and limited liquidity, which makes it difficult for people to find someone to trade with. This is where the liquidity providers come in. They are a lifeline in the world of trading in the decentralized finance
What /who is a liquidity provider?
A liquidity provider is a person like you and me who provides and locks our crypto asset to a platform. LP's serve as intermediaries to provide liquidity in the market. They bridge the gap between the participants in the market by holding a position. In this way, they are able to make a market for an asset. That's why they are also referred to as market makers. Anyone can enter the market to buy and sell at anytime without waiting for who to transact with because of high liquidity
Why should I provide liquidity to an asset?
We all have preferences when it comes to the projects we love and believe in. For instance, in the Defi world, there are many projects that need people to help provide liquidity for their tokens. As a token holder, it's always advisable to be a part of it. If all 1000 holders of token X for example provide liquidity for that token, it would boom. Why? transactions would be going on all the time. The market will not be dull, and the asset will have good liquidity. And to think of it, every investor is looking for projects with good liquidity to invest in
No huge investors would invest in a project without good liquidity. If you build up a position and cannot sell at the price you want, you may run into loss. If you place a huge order in a market that is not liquid, it may result in high slippage, which can make your trade to be executed at an unintended price. Liquidity helps the slippage of an asset, because it helps to provide more buyers and sellers
Liquidity pool
When we say liquidity pool, we are not talking about a pool of water. It's a pool of assets. We cannot talk about liquidity without a smart contract because the smart contract is what makes the liquidity pool to exist. So in a nutshell, liquidity pool is a smart contract that is written to hold funds, and allow you to trade based on a mathematical calculation, done by the smart contract
Being a liquidity provider helps a project, and at the same time, you earn as a LP. So it's a win win. There's a slight fee on every transaction made while providing liquidity. Every LP's get a share of the fee based on the amount of token provided liquidity. The people provide liquidity to a project, the more the APR reduces. A project like Holozing has a very high API at the moment, because it's a new project. However, it has started making waves, and as users continue to provide liquidity, the APR will also begin to reduce. Note that providing liquidity to some projects on the hive Blockchain does not attract any fee
Providing liquidity to projects helps the project and at the same time helps the LP's to earn passive income on their tokens provided as liquidity. However, it's important to be careful when providing liquidity to the project, because of rug pull and impermanent loss. On the hive Blockchain, you can provide liquidity to any project of your choice. It's very simple. You can do that on hive engine. Note that this is not financial advice. You are free to decide on what you want, and what's good for you. If you've made it to this point, I appreciate you for going through my piece
This is ckole the laughing gas
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I think most of us, specially on Hive, don't really know much about this, and tokens don't get the support they need to thrive because even people benefiting from them just buy and sell, or earn and sell, but don't become a part of the tokens ecosystem.
I also recently learned about liquidity pools and have been checking on it and how to be a part, also why to be a part.