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What Does “Liquidity Provider” Mean (Regarding Liquidity)?

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In the field of digital currency, we often hear the term \”liquidity provider,\” w

What Does Liquidity Provider Mean (Regarding Liquidity)?

In the field of digital currency, we often hear the term “liquidity provider,” which is actually a very interesting term because it represents a part of financial transactions. For Bitcoin, this statement is correct as there is no one to stop its upward trend. But what about Ethereum? People have now become accustomed to calling it “decentralized finance” or DeFi.

This raises a question – what does it mean to be a liquidity provider?

In the development history of blockchain technology, many projects have had similar functions and products. For example, smart contract platforms like Ethereum can be directly developed if you want to make the code of these projects completely open source. So many people refer to liquidity providers as “market makers.” However, these services are not a way of providing funds. They are mainly used for various purposes, such as hedging tools, lending, and swaps.

Currently, there is a method called “token exchange” in the market to achieve the conversion between tokens. For example, MakerDAO, a protocol based on Ethereum, is designed to provide liquidity to token providers and issue stablecoin USDC through DAI for redemption.

So what is “token exchange”? Simply put, it means that tokens can add liquidity to a token pool based on a set price within a specific period of time.

Specifically, when the value of an asset changes, the asset will be automatically sold at a certain price and redistributed to token holders’ shares to obtain a corresponding amount of token rewards.

Usually, there are two modes for tokens. One is that users choose to deposit their locked assets into a certain exchange or pledge them on the platform’s tokens. The other is that tokens are distributed among different exchanges. Therefore, most tokens will gradually thaw over time and gradually disappear as time passes.

Of course, this takes some time. After all, there are still some unique aspects worth noting in the blockchain industry, such as the recent congestion of Ethereum and the emergence of Compound.

However, in the past few months, due to the rapid development of DeFi, more and more projects have started to use liquidity and mining concepts to attract more participants, making tokens more popular.

Now let’s take a look at what a liquidity provider is in the most vivid form. It is an ecosystem consisting of various types of projects, including DEX, lending markets, oracles, and synthetic assets.

Regarding Liquidity

Liquidity refers to the funds that provide a certain degree of liquidity in trading-based financial markets. It refers to information asymmetry and price relationships between third-party intermediaries, such as banks and monetary institutions. This means that they can profit from arbitrage or other actions based on their own conditions.

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