A liquidity provider (LP) is a person or organization that supplies assets, such as cash, stocks, or cryptocurrencies, to a market so others can easily buy or sell.
In both traditional asset markets and cryptocurrency markets, liquidity providers usually deposit a combination (or ratio) of assets, say, cash and stocks or Ethereum [↗] and USDT [↗]. LPs earn transaction fees, or a share of them, as other participants buy and sell these assets within the market.
Liquidity providers help ensure markets remain active by solving the "chicken-and-egg" problem that occurs when there are few or no participants to take the opposite side of a trade.
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