In Web2 trading, centralized exchanges use order books, where buyers and sellers place bids and asks, and trades are matched by the platform. Liquidity comes from market makers and large investors, while traders rely on the exchange to process transactions and hold their funds.

In Web3, traders swap assets directly against a liquidity pool, which refers to a “pool” that holds two or more assets (e.g., ETH/USDC) on a decentralized exchange (DEX). Instead of order books, prices are determined algorithmically.

Liquidity provision refers to the process of depositing assets into a liquidity pool, enabling trading on DEXs. Liquidity providers (LPs) supply two assets (e.g., ETH and USDC) and, in return, earn a share of trading fees generated by swaps in the pool.

Unlike traditional exchanges that require buyers and sellers to match orders manually, DEXs use smart contracts to price assets algorithmically based on supply and demand within the pool.

To learn more about liquidity provisioning, visit:

• How Liquidity Provisioning Works
• Why Provide Liquidity?
• Liquidity Provisioning Key Terms
• Liquidity Provisioning Risks & Considerations
• Liquidity Provisioning Key Platforms