The introduction of decentralized exchanges provided an alternative avenue to interact with crypto assets without requiring authorization or permission. Unlike centralized exchanges that satisfy liquidity demands via order books, decentralized exchanges rely on liquidity pools which consist of various crypto deposits by users who are optimistic about earning a profit.
Liquidity Providers contribute to an existing pool or create a new pool and are compensated with a unique Liquidity Provider (LP) token that represents the size of their contribution in terms of the total pool size. For example, if a pool of tokens to the tune of $1,000 is created and the provider contributes $200 worth of tokens then they garner 20% of all LP tokens generated for that exchange.
Pool creators and Contibutors clock in rewarding fees every exchange, from there fees distributed to liquidity providers based accounts of their LP tokens owership ratio. LP tokens also be connected to lending platforms such as Aave, used as collateral to apply crypto loans.Additionally, those who provide liquidity to Curve’s lending pools obtain extra profit from the lending platforms.
Providing liquidity in exchanges is accompanied by the long temporalbinding period due to lock restrictions that varies from 7-12 months.
