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Liquidity Provider (LP) Meaning

A user who deposits their digital assets into a liquidity pool to facilitate trading. In exchange for providing this "capital at risk," the LP earns a portion of the trading fees generated by the pool, as well as any "Liquidity Mining" rewards offered by the protocol.

LPs are the "Market Makers" of the decentralized world. However, they face a unique risk called "Impermanent Loss." If the price of the tokens they deposited moves significantly, they may end up with less total value than if they had just held the tokens in a private wallet.

Being an LP is a form of "Active" investing. It requires monitoring the "Pool Ratio" and the "Yield" to ensure that the income from fees is greater than the cost of IL.

It is a critical role that ensures decentralized markets remain deep and stable for everyone else.

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