What is a Liquidity Provider?

My entry October 7th, 2020 Steemcryptochallenge Week #2 Diving into Diving into DeFi

Source

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

A dollars worth of each token is a dollar equivalent pair.

Example
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.

Transaction Fees

Suppose you deposit Sun and TRX into a Sun-Trx swap pool on JustSwap.
Noe every time some swaps Sun for Tron on JustSwap they pay a transaction fee. And as a liquidity Provider you get a percentage.

Liquidity Provider Pool Share Determines Transaction Fee Share

Suppose you have 1000 Sun and 5000 TRX deposited in a Sun-Trx trading pool on JustSwap, and the pool contains 100,000 Sun and 500,000 Trx. Your share: 1000
Total pool 100,000
Your pool share is 1%
So if there were 100$ in transaction fees in 24 hours you get paid 1$ or about 50 Trx at a Trx price of 0.02 $ or 2 cents.

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.

Why be a Liquidity Provider versus a Trader

Safety and reliability

Traders make money buying and swelling. If you trade you know that not every trade makes you money. Many trades are for assets you plan to hold for days, weeks or even years. Plus even for short term traders, not all of their trades make money. In fact I am bold enough to say that the majority of a traders trades don’t make money, but all traders are hoping for that Big Trade, which wil make them rich. In contrast, the people who create trading exchanges are hoping to make money one day and be rich. They invest their money in trading pairs and make a little money on every trade. Small consistent profits, not from trading, but from facilitating trading.

Last words....
I visited San Francisco, California, a famous city in the USA. The city is famous because of the Great California Gold Rush, a time when one man became rich overnight when he discovered a gold mine close to the surface in the hills around San Francisco. The news of his fast rise to wealth spread across the entire country. Then thousands of people quit their jobs, left their homes, and travelled hundreds or even thousands of miles to mine gold in the rivers, streams, forests and valleys, around San Francisco. They were people from diverse backgrounds, who sold all their belongings, and took their life savings to California to mine the rivers, streams and valleys around San Francisco for gold.

When I visited, I saw a beautiful neighborhood in the hills overlooking downtown San Francisco and the ocean. I asked my tour guide who lived there. I expected him to say, it was the descendants of the people who came to San Francisco to mine gold. Instead he said, it was the descendants of the people who sold people equipment to mine gold. In reality, few miners got rich, but many shop keepers did....

The moral of the story, he said, was sell shovels.

@shortsegments

#steemcryptochallenge #deepdiveintodefi justswap #liquidity-provider #steemcurator01 #steemcurator02 #promo-steem