The Liquidity Provider
The definition of being a Liquidity Provider, one who deposits dollar equivalents of trading pairs into the trading pools in exchange for a portion of the transaction fees paid by traders who trade or swap assets on these decentralized exchanges. Providing Liquidity is profitable and safe, so it is attracting investors from outside of cryptocurrencies usual ranks, and it has resulted in billions of dollars moving into DEFI this year.
Dollar Equivalent Pairs
Dollar Equivalent Since the ERC token wrapped Bitcoin represents one Bitcoin and all its value, if Bitcoin is worth 4000 dollars USD and Ethereum is worth 400 dollars USD, then one wrapped Bitcoin, WBTC is worth 4000 dollars USD.
Furthermore, in DEFI, since one Bitcoin valued at 4000$ would be worth ten Ethereum worth 400 dollars USD.
In the example above, where for simplicity, I said if Bitcoin was worth $4000.00 and Ethereum was worth $400.00, a Dollar Equivalent Trading Pair would contain One Bitcoin to Ten Ethereum. So if you wanted to provide Liquidity to a Trading Pair on a decentralized trading exchange, you would need to possess both Bitcoin and Ethereum in a ten to one ratio. Fortunately you don’t need a whole Bitcoin or a whole Ethereum, just a ten to one ratio in value.
So if you wanted to earn money without selling your cryptocurrency, you could become a Liquidity Provider on a decentralized cryptocurrency swap exchange, like Uniswap or JustSwap. If you become a Liquidity Provider, the platform pays you a percentage of all the transaction fees for swaps or trades done that day, for the trading pair you provide liquidity for.
As long as there’s lots of transactions or large monetary incentives being a Liquidity Provider can be very profitable.
As always research these opportunities careful , so you understand the risks.