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Why Provide Liquidity?

Providing liquidity in DeFi means contributing your crypto assets to a liquidity pool on a decentralized exchange (DEX). In return, you earn a share of trading fees - and sometimes additional incentives like token rewards.

But why would you want to do this instead of just holding, staking, or trading?

💰 1. Earn Passive Income​

Every time a user trades on an Automated Market Maker (AMM), they pay a small fee. That fee gets split among the liquidity providers (LPs).

For example:

  • On Uniswap, LPs may earn 0.05%–1.0% of each trade in their pool.
  • On Orca, LPs earn a fee that depends on the pool type and range.
  • On Raydium, additional incentives (like RAY tokens) may be included.

This means that your crypto can earn yield without being sold - even during sideways markets.

🔁 2. Compound & Reinvest​

You can withdraw earned fees at any time, or reinvest them back into your position to compound your returns.

Advanced LPs use strategies like:

  • Manual fee harvesting and redepositing
  • Auto-compounding vaults (when available)
  • Range adjustments based on price action

📈 3. Support Liquidity = Enable the Market​

In centralized finance, market makers are firms. In DeFi, you are the market maker.

By providing liquidity, you:

  • Make decentralized trading possible
  • Reduce slippage and improve efficiency for others
  • Participate in building the next-gen financial rails

And you get paid for it. For most of the time, crypto trades sideways or consolidates. By providing liquidity, you help ensure that when the market does move, there/s enough depth to handle it. But even better, your capital is working for you while you wait. Grow your capital stake while you sleep, work, or play. It's the ultimate side hustle that a lot of people don't even know about.

⚠️ Why You Might Not Want to LP​

Liquidity provision isn't free money. Key risks include:

🔻 Impermanent Loss (IL)​

When the price of one asset in your pool moves significantly relative to the other, you could end up with less value than if you'd just held. We'll explain this fully in the Risks section.

🔓 Smart Contract Risk​

Your assets are locked in smart contracts. If the protocol has bugs, gets hacked, or is rug-pulled, you could lose funds.

📉 Volatile or Thin Pools​

Some pools have poor volume or unpredictable returns. Picking the right pairs and ranges is critical - especially on concentrated liquidity platforms.

✅ When It Does Make Sense​

Liquidity provision may be a good fit if:

  • You/re comfortable holding both assets in a trading pair
  • You want to earn real yield from trading activity
  • You plan to stay in the position for at least several days or weeks
  • You understand the risks and can manage your range and strategy

➡️ Next: Learn LP Strategies​

Now that you know why, let/s talk about how. Explore beginner and advanced LP strategies to get started:

👉 Start with Strategies →