Liquidity provisioning is popular as it allows users to earn passive income by depositing assets into a DEX liquidity pool. In return, liquidity providers (LPs) receive a portion of trading fees generated by swaps in the pool. Some platforms also offer additional incentives, such as yield farming rewards, governance tokens, or boosted APRs for providing liquidity to specific pools.

That being said, liquidity provisioning carries risks. 

One major concern is impermanent loss, which occurs when the price of deposited assets changes significantly compared to when they were first added to the pool. If the price of one asset rises or falls sharply, LPs may end up with more of the lower-value asset and fewer of the higher-value asset when they withdraw, potentially resulting in lower returns than simply holding the assets outright.

Additionally, DEX smart contracts are not risk-free, as exploits or vulnerabilities in the code could result in funds being lost or stolen.

For these reasons, liquidity providers must carefully select pools, monitor price movements, and assess potential risks before depositing their assets.

To learn more about liquidity provisioning, explore our sections on:

• Liquidity Provisioning Overview
• How Liquidity Provisioning Works
• Liquidity Provisioning Key Terms
• Liquidity Provisioning Risks & Considerations
• Liquidity Provisioning Key Platforms