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What is a liquidity provider?
A liquidity provider (LP) is someone who deposits a pair of tokens into a liquidity pool so others can trade against it. In return they receive LP tokens or a position that records their share, and they earn a portion of the pool's trading fees.
What it means for you
Your LP tokens or position are the only claim on your deposit; losing the wallet that holds them loses the deposit. When prices move, the pool rebalances and you can withdraw a different mix worth less than simply holding the two tokens. Fees may or may not make up the difference.
How it works
To provide liquidity you deposit both tokens of a pair in the ratio the pool currently holds. In the simpler pool design you receive fungible ERC-20 LP tokens; in concentrated-liquidity designs you receive a position, recorded as an NFT, that supplies liquidity only within a price range you choose. Swap fees accrue to providers in proportion to their share. When you withdraw, you get your share of whatever the reserves hold at that moment, after arbitrage has rebalanced them, not the amounts you put in.
Sources: Uniswap docs: How Uniswap works, Uniswap docs: Pools (v2) · checked 4 October 2026
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