Definition ∞ Liquidity providers are individuals or entities who supply digital assets to decentralized exchanges or lending protocols. They deposit pairs of cryptocurrencies into liquidity pools, enabling other users to trade or borrow assets efficiently. In exchange for providing this essential market function, liquidity providers typically earn a portion of the trading fees or interest generated by the protocol. Their contributions reduce slippage and enhance market depth.
Context ∞ Liquidity providers are crucial for the operational viability and efficiency of decentralized finance ecosystems. News often covers the incentives and risks, such as impermanent loss, associated with providing liquidity to various protocols. The competition for liquidity provision drives innovation in yield farming strategies and protocol design to attract capital.
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