Search post, tags and authors
What Is A Liquidity Provider?
Crypto Basics For Beginners

What Is A Liquidity Provider?

By Oreld Hadilberg
Reviewed by Tony Spilotro

Table of Contents

Liquidity is the ease with which an asset can convert into cash without adverse effects on its market price. Crypto liquidity providers are investors that stake their crypto assets on decentralized exchanges to earn transaction fees.

This process is called liquidity mining or market making. These moves provide profit from fixed interest rates for transactions. The interest is based on how much liquidity is available. Also, the number of transactions in a particular liquidity pool will affect the interest rates.

Liquidity providers are essential to any financial market, since their absence will cause an illiquid market. Keep reading to find out more and the best platform with adequate liquidity providers.

Cryptocurrency Liquidity Providers, What Is Their Work?

A cryptocurrency liquidity provider controls both sides of a transaction, buying and selling crypto assets at determined prices. This action is called market making.

Crypto liquidity providers are given Liquidity Provider (LP) tokens after depositing their assets in a DeFi pool. These LP tokens return to the DeFi system when the provider wishes to withdraw their coin deposits.

Cryptocurrency liquidity providers ensure that the market stays healthy by providing liquidity at all times.

Liquidity Provider ≠ Market Maker

What is a liquidity provider? A liquidity provider is an institution or individual who quotes the buy and sells price of assets to make a profit. Liquidity providers make the markets liquid and easy for buyers and sellers to trade.

For instance, a crypto liquidity provider commits assets to make sure that a token has sufficient trading volume for buyers and sellers to make a profit.

Market makers, on the other hand, are institutions that guarantee the execution of orders making the market active. They provide bids and asks in a market, creating liquidity and depth in the market.

Market makers are big-time players like banks, funds, and other institutions that control a large volume of assets in the market.

Liquidity providers act as middlemen between brokers and market makers. Brokers offer active traders an order book with depth. An order book is an electronic list of buy and sell orders for a given asset organized by price level.

On centralized exchanges, crypto liquidity providers must submit limit orders constantly to the market. They must quote the bid and ask prices at all times. The Market Maker does not always provide liquidity like a cryptocurrency liquidity provider.

Some market makers are out solely for profit and operate with their capital. They carry out numerous transactions to profit from the spread between the quoted bid and ask orders.

However, designated market makers (DMMs) are bound by contracts to support a particular asset with liquidity. These market makers can act as cryptocurrency liquidity providers.

What Factors affect Crypto liquidity

Several factors affect liquidity in any given market. They include trading volume, usability, and regulations.

Trading volume

The trading volume of any cryptocurrency affects its liquidity. A higher trading volume indicates more buying and selling activity for the token and vice versa. Crypto liquidity providers will naturally back the tokens with a higher trading volume since they will yield more profit.

The trading volume is also affected by crypto awareness, which is increasing rapidly.


A usable cryptocurrency will attract more investment and liquidity. Most crypto projects support faster transactions and modern innovations. If a crypto token serves as a mode of payment or a store of value, it increases in value and becomes more liquid.


Crypto is banned in certain regions for trading and as a mode of payment. This state reduces the liquidity in such areas, since a ban on crypto activities will also affect the exchanges.

A cryptocurrency liquidity provider will not want to commit to a region with restrictions and possible penalties for trading.

Why Does Liquidity Matter To Traders?

There are many reasons liquidity matters to traders. Find them below.

More investors

Liquidity makes it easy for traders to buy and sell in a particular market. When the market is liquid, it will attract more investors. But an illiquid market is much more volatile since fewer trades will make the prices unstable.

Lower costs

Liquidity also lowers trading and investment costs. Assets with high liquidity have tight bid/offer spreads, which are the buy and sell costs. Markets with less liquidity have a wider spread; between the buy and sell prices, and these increase trading costs.

Slippage reduction

Greater liquidity will ensure the quick execution of orders and reduce slippage. Slippage is the price change before an order executes.

How Should An Investor Choose A Liquidity Provider?

Factors to consider when choosing a liquidity provider include Reliability, Instruments, execution, and pricing.


A crypto liquidity provider must have a proven track record of credibility before an investor commits to the provider. It is wider to choose a publicly listed company to provide liquidity.

A market broker will access information on their financial stability and the amount of liquidity available.

Availability Of multiple instruments

A cryptocurrency liquidity provider must offer multiple asset liquidity and possess a rich order book. Providing liquidity alone is not enough, as the right crypto and fiat pairs should be available. The availability of multiple instruments will give traders options to choose from for profitable trading.

Moreover, crypto liquidity providers must provide traders with a complete order book on a trading platform with access to complete data.


Order execution timing is crucial in trading and is vital in picking the right crypto liquidity provider. The execution time of an order should be fast without requotes or rejects.

Trading carries a high amount of risk. So, time-priority execution and full trade transparency is a must. Also, the execution system must be well-detailed.


Cryptocurrency liquidity providers must also offer low overnight fees. It will be outrageous to pay exorbitant fees during trading, as traders will not profit.

So, pricing is a valid consideration in choosing the right liquidity provider.

Who Are The Providers Of Crypto Exchange Liquidity?

Cryptocurrency exchanges derive their liquidity from pools. A liquidity pool is a smart contract that locks users’ tokens to provide liquidity. Cryptocurrency liquidity providers join these pools and increase the available liquidity in the market using blockchain technology.

Also, order books add liquidity to the market. With order books, buyers and sellers place orders and specify the quantity and price required. These orders are matched by exchange, and the asset price is defined.

Why Choose Margex

Margex is a global cryptocurrency exchange registered and licensed to handle all your trading and investment needs in crypto. Moreover, Margex has 12 liquidity providers with other standout features that make the platform unique.

Margex standout features


Data is precious and should not enter the wrong hands. We protect users’ data at all costs and consider it unethical to sell such.

Secure trading

Margex uses a highly advanced trading infrastructure that can withstand the pressures of a volatile market. Cryptocurrencies are stored in cold offline wallets to guarantee their safety at all costs. One of the instruments used for this is the MP Shield System.

What is the MP Shield™ system?

The crypto market is highly volatile and relatively new. Price manipulation is a real issue in financial markets. The MP Shield™ looks to counter this problem and is exclusive to the Margex platform.

How It Works

  • The price of an asset on Margex is determined by the combined liquidity of 12+ cryptocurrency liquidity providers.
  • Margex does not offer illiquid assets with prices artificially inflated by misleading statements to facilitate pump-and-dump schemes.
  • AI-based algorithmic technology by Margex consistently monitors the frequency of price feeds from each crypto liquidity provider.
  • To ensure safe and secure trading on our platform, Margex monitors suspicious trading activities constantly.


It remains our watchword. Every information you need is available and easily accessible with round-the-clock customer service at your fingertips.

Margex also offers users leverage in trading our numerous instruments with periodic additions. Also, the staking program shields users from impermanent loss suffered on other platforms.

Frequently Asked Questions

Find some common questions you might ask about liquidity and crypto liquidity providers.

What does crypto liquidity mean?

In crypto, liquidity measures an asset's ability to convert into another token or fiat currency. It affects the price of cryptocurrencies and determines if the asset is tradable. Liquid markets offer traders an easy exit, while illiquid markets put traders in a difficult position.

Does liquidity boost crypto prices?

Adding liquidity increases the price of crypto. It is a measure of the demand and supply of an asset and an indication of a healthy market.

If an asset has much liquidity, it means there is an increase in buyers and sellers, which will raise the price of such an asset.

How do crypto liquidity providers earn?

Cryptocurrency liquidity providers make money through transaction fees on the platforms where they provide liquidity. These transaction fees are shared among liquidity providers in a pool. Therefore, you earn more when you stake more assets in the liquidity pool.

Some liquidity pools also give rewards as incentives that accrue to people who stake their currency.

What does a crypto liquidity provider do?

A liquidity provider is a broker that acts as a market maker for a chosen asset class. Liquidity providers buy and sell an asset at a particular price, implying that they give directions to the market price.

They also serve as middlemen in the market, making sure buyers and sellers have access to the crypto asset they represent.

How to become a cryptocurrency Liquidity Provider?

To become a crypto liquidity provider, you must invest in a high liquidity pool. Use liquidity aggregator programs to monitor the asset price ranges and invest in a pair that offers the best prices.

To become a DeFi liquidity provider, you must sign an agreement. That agreement allows you to participate in different liquidity pools and platforms.