A market requires a sufficient amount of a specific token that users can exchange for another token they have in their wallet. The kind of liquidity a market needs is determined by the base asset of the token. For example, if a market’s base token is ETH, then the liquidity provided to it can only be ETH.
On centralized P2P marketplaces, the liquidity provider is known as the maker, seller, or merchant. The users who buy the liquidity are known as takers or swappers.
A liquidity provider is a person or entity that transfers any amount of a market’s base token into the market. The tokens provided as liquidity can then be swapped for the market’s quote token at an exchange rate determined by the liquidity provider. For example, in an ETH/USDT market, the liquidity provider transfers ETH into the market and gets back USDT after a swap operation.
A liquidity provider can add or remove liquidity at any time.
Liquidity providers (LP) are responsible for setting the price of their liquidity. The liquidity provider will be required to specify how much of the market’s quote token they want in exchange for 1 (one) base asset. LPs are allowed to update the price of their liquidity at any time.
A liquidity manager is a wallet that can be granted permission to update the price of liquidity in a specific market. Liquidity providers may use software that automatically manages the price of their liquidity to keep it in sync with the current market price. Liquidity managers cannot do anything else.
Apart from the price, there are other parameters that a liquidity provider can employ to control their trading experience within a market. They include:
- Minimum Swap Amount: This is the minimum amount of liquidity that can be swapped. The transaction will fail if the swap includes an amount lower than the LP’s minimum.
- Maximum Swap Amount: The maximum swap amount limits the amount that can be swapped in a single transaction. This limit can help a liquidity provider manage how quick their liquidity is depleted.
- Payment Time: Liquidity providers can specify when they expect to receive payment in a market where the taker is expected to send off-line payment (ex: bank transfer, PayPal etc.). It also specifies the duration when the LP is expected to send payment using an off-chain channel. When this duration elapses, a grace period is entered and subsequently marked for cancellation if there is no indication that payment was made.
- Pause: Liquidity providers can pause their liquidity at any time. To pause liquidity means to prevent it from accepting new swaps. Pausing is helpful when the liquidity provider wants to take a break but does not want to remove their liquidity.
For adequate distribution of the P2P token, Liquidity providers in verified markets will be rewarded with P2P tokens after every trade. We believe users contributing to the growth of the protocol deserve to benefit from token distribution. However, once the allocation for this exercise is depleted, no further rewards will be earned.
Unlike AMM exchanges, liquidity providers do not earn fees. However, the Joint protocol will distribute some of the initial P2P token supply to liquidity providers in some verified markets. Once the allocation for this exercise is depleted, no further rewards will be earned.