Importance of Liquidity Providers
Liquidity providers (or LPs) build the market by providing liquidity. In the AMM protocols, liquidity providers decide the initial price and allocate their assets in 1:1 ratio in the pools. For example, to provide liquidity in the ETH-USDT pool, LPs allocate 50% of their assets in ETH and the remaining 50% in USDT. If the LP wants to provide $6000 worth of liquidity and the initial price of ETH is 3000 USDT then he needs to deposit 1 ETH and 3000 USDT in the pool. In the orderbook models, LPs set buy and sale orders at a close price. For the provided liquidity, we can buy and sell our favorite assets easily in the market for our desired price and amount.
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