Liquidity providers are a key component of decentralized exchanges (DEXs) or Decentralized Applications (dApps) such as Onramper. It involves contributing tokens pertaining to a specific liquidity pool, enabling users to swap one cryptocurrency for another.
Asset Pairing
Liquidity providers contribute tokens in pairs. For instance, in the AVAX/WETH pool, two tokens are paired together: AVAX and WETH. The pairing forms the basis of the liquidity pool.
Algorithmic Pricing
Liquidity pools use algorithmic pricing mechanisms to determine exchange rates. As more users transact within the pool, the pricing algorithm adjusts the exchange rate to maintain equilibrium between the paired tokens (LPs).
NOTE: Liquidity providers maintain control over their assets at all times. They are not required to entrust their assets to any third party. Furthermore, Liquidity providers will always have liability over their own share of the liquidity pool that they participate in.
Trading Fee Rewards
Liquidity providers earn rewards from trading fees paid by users who trade within the pool. These fees are distributed among all liquidity providers based on their share of the pool.
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