What Does It Mean to Provide Liquidity for Crypto?

Liquidity refers to how quickly and easily an asset can be exchanged without significantly affecting its market price. Put simply, the faster and easier an asset may be traded, the more liquid it is. Liquidity is even more important when it comes to discussing cryptocurrencies. It has a direct impact on how effectively investors and traders can manage their digital asset portfolios in a market that never sleeps and changes by the minute, unlike traditional finance. But who are the liquidity providers, and what does it mean to provide liquidity for cryptocurrencies? Read the answers in this article.

What Is a Liquidity Provider in the Cryptocurrency Market?

​​In contrast to traditional finance, the concept of liquidity in crypto includes the immediate execution of trades on exchanges with minimal price impact, the general availability of tokens across various markets, the overall transaction volume flowing through a blockchain, and the functioning of decentralised finance (DeFi) protocols such as decentralised exchanges and lending platforms. Stablecoins add another dimension by offering a reliable bridge for entering and exiting digital assets that are often volatile. Together, these elements shape the liquidity landscape of the crypto economy.

At the centre of all these mechanisms are liquidity providers of cryptocurrencies. When it comes to centralised crypto exchanges (CEXs), especially major ones like Binance or Bybit, it’s professional financial and trading firms, or crypto whales, that take on the role of liquidity providers and allocate funds into the order books of exchanges.

The volume of trading cryptocurrencies has multiplied by an order of magnitude since 2018. 2024 saw a new all-time high (ATH) for daily trading volume of $3.71 trillion, set on December 9, 2024, according to CoinMarketCap. The previous record of $2.86 trillion was set on November 15, 2021.

Such a busy market must be fed by vast amounts of numerous digital assets, supplied to both buyers and sellers. To the greatest extent, this task is fulfilled by liquidity providers.

Difference Between Liquidity Providers and Market Makers in the Crypto Market

Although the words ‘market maker’ and ‘liquidity provider’ are often used synonymously, there is actually a big difference between these terms. Usually, market makers occupy a more active position, applying complex crypto market making trading strategies to incentivise exchange operations and earn profit. By adjusting these prices in real-time based on market conditions, they help maintain tight spreads and efficient price discovery, while also earning returns from the difference between bid and ask prices.

Liquidity providers of digital assets, more broadly, are entities or individuals who contribute assets to trading venues in a more passive manner. Some operate like market makers, engaging actively with the market, while others simply deposit tokens to support trading pairs without ongoing intervention.

TL;DR: While market makers actively quote prices to create liquidity, many LPs on DeFi protocols passively deposit tokens into smart contracts to facilitate trading.

Understanding how liquidity providers operate in the crypto market helps clarify their role and importance within the broader ecosystem.

​​How Do Liquidity Providers of Cryptocurrencies Operate: Centralised vs. Decentralised Methods

​​On centralised exchanges (CEXs), professional liquidity providers (LPs) continuously post buy and sell orders on the order book, narrowing the spread and increasing market depth. These trading institutions stand ready to take the opposite side of trades, earning profits from the bid-ask spread in return. High liquidity at this execution layer allows large trades to clear close to the market price with minimal slippage. However, when liquidity is thin, even moderate orders can cause significant price movement.

Beyond centralised exchanges, DeFi protocols introduced a fundamentally different approach to liquidity provisioning.

Decentralised exchanges (DEXs), as one of the first use cases of DeFi, stopped using traditional order books at all. Instead, they rely on liquidity pools: shared pools of tokens locked into smart contracts by liquidity providers (LPs). Through smart contracts that employ a formula to ascertain the price, traders exchange one asset for another (modern implementations use more sophisticated mechanisms for price discovery).

The combination of liquidity pools and LPs essentially led to the emergence of decentralised liquidity provisioning of cryptocurrencies, unique to financial markets.

To ensure the smooth operation of liquidity pools and exchange operations on DEXs, these protocols employed the model of the automated market maker (AMM), which sets trade prices in line with pool token ratios. When a trader purchases one token from the pool, they are required to contribute to the opposing side of the pair, thus altering the price algorithmically instead of aligning with a particular seller. This way, AMMs enable ongoing liquidity in DeFi: anyone can trade crypto against a pool at some price as long as it has reserves.

Let’s dive even deeper into liquidity pools to understand how decentralised trading actually works behind the scenes.

Understanding Liquidity Pools in DeFi

Liquidity pools are at the core of DeFi. They hold pairs of tokens in smart contracts to enable trading without traditional order books. Let’s take the basic implementation of AMM for an ETH/DAI pool, which allows users to swap Ethereum and DAI directly.

To stay balanced, the pool must possess equivalent value in both tokens. For instance, if there’s $1 billion in the pool, $500 million should be in ETH and $500 million in DAI. Prices are set by a simple mathematical rule: the constant product formula (x × y = k), which adjusts the price as the ratio of tokens changes. The more one token is withdrawn, the more expensive it becomes, maintaining the balance, as illustrated in the scheme below.

Users will trade DAI for ETH if demand for ETH rises, lowering the ETH supply in the pool and raising its relative value to DAI. The formula guides this natural change.

Although it is crucial to understand how AMM enables decentralised liquidity provisioning in DeFi, we should note that DEX technologies developed this mechanism since the launch of the first modern protocols such as Uniswap around 2017 and 2018. For instance, Uniswap V3 allowed for the so-called Concentrated Liquidity, while Uniswap V4 introduced Hooks and Singleton Contracts, further complicating the AMM model and its possible configuration setups.

To align pool pricing with the broader market, smart contracts in DeFi protocols frequently utilise decentralised oracles, which are external data feeds that provide market price information. If the pool’s price diverges, arbitrage traders step in to profit from the gap, bringing prices back in sync.

Providing liquidity for cryptocurrencies can generate returns through trading fees and token rewards, but because of its technical complexity, these activities are not without risks that we will cover next.

Risks Associated with Decentralised Liquidity Provisioning in Crypto

One of the typical challenges for LPs in DeFi is impermanent loss, which is a temporary reduction in value occurring when the prices of the deposited tokens diverge significantly from the time they were added to the pool. If this price shift is significant and not reversed, the loss can become permanent upon withdrawal.

Another risk is the reliance on smart contracts. Since DeFi platforms are built on code, any bugs or vulnerabilities in the contract logic could expose liquidity providers to potential exploits or loss of funds. Unlike traditional finance, there is no central authority to step in and stop a bad transaction.

Furthermore, the broader volatility of crypto markets can affect the value of assets that are held in a pool. Sharp price swings can cause general returns to vary even with great trading volume.

However, the biggest threat for traders and liquidity providers in DeFi protocols remains hacker attacks that led to the loss of millions and even billions of dollars worth of crypto every year.

For instance, in its 2025 Crypto Crime Report, TRM Labs estimated that about $2.2 billion in crypto was stolen in 2024 alone. A research study of top 100 DeFi hacks conducted by Halborn revealed that the total value of stolen cryptocurrency from 2014 to 2024 stood at approximately $10.77 billion. Hackers utilise a wide range of attacks against decentralised protocols, apps, and platforms: from phishing and market manipulations to exploiting smart contract vulnerabilities and governance systems.

Centralised exchanges, although they also become victims of cybercriminals, are less prone to external attacks, especially when comparing the value of stolen cryptocurrency with the overall amount of user funds stored on CEXs. These platforms show more resilience due to their centralised nature. This is one of the reasons why most of the trading volume still corresponds to CEXs. According to The Block, DEX trading volume was only about 24% of CEX’s in May 2025.

As CEXs employ centralised liquidity providers of cryptocurrencies, they continue to dominate and are responsible for ensuring trading operations in the entire crypto market. Moreover, as DeFi evolves, so do centralised crypto liquidity providers: using substantial resources, they extend their scope beyond centralised venues to include more DeFi strategies such as lending and decentralised liquidity provisioning.

That is why all crypto projects with enough capital to execute an efficient go-to-market strategy also employ centralised liquidity providers of crypto for digital assets they issue, whether it is a blockchain’s native coin, utility, or governance token within a dapp, so that it would be present on different crypto markets, drawing the attention of the trading community.

Below, you can check the list of the biggest liquidity providers of cryptocurrencies in 2025.

4 Top Liquidity Providers of Crypto in Centralised and DeFi Markets

As of 2025, a number of firms are widely recognised for their role in maintaining liquidity across crypto markets. Here’s the list of notable centralised crypto liquidity providers:

DWF Labs 

DWF Labs provides liquidity for cryptocurrencies alongside a broader range of crucial services such as venture capital, market making, and ecosystem-based support for blockchain projects, as well as decentralised liquidity provisioning in DeFi protocols. In recognition of its performance, DWF Labs was awarded ‘Top Liquidity Provider by Bybit in 2023’, and ‘Liquidity Provider of the Year’ by Blockchain Life in 2024.

Jump Crypto

Jump Crypto, a part of the proprietary trading firm Jump Trading, operates across global venues and contributes liquidity through high-frequency trading infrastructure. The firm is active in spot and derivatives markets.

GSR

GSR Markets offers liquidity services to exchanges and crypto token projects. It is involved in both market making and liquidity provisioning across centralised venues.
GSR Markets offers liquidity services to exchanges and crypto token projects. It is involved in both market making and liquidity provisioning across centralised venues, helping to maintain liquidity and market depth in various trading pairs.

Wintermute

Wintermute is an algorithmic trading firm active on centralised and decentralised platforms. It plays a role in sustaining market depth and reducing spreads across a range of trading pairs.

Conclusion

Providing liquidity is a vital function in the digital asset economy. Liquidity guarantees that trading stays seamless, quick, and easily accessible, whether it is done algorithmically by institutional market makers on centralised exchanges or by individual users helping to create liquidity pools on DeFi platforms. As digital assets continue to gain traction, the role of liquidity providers remains foundational to crypto market integrity in both centralised and decentralised segments. Understanding how liquidity is supplied for trading, what risks are involved, and who the major players are can help individual users make more informed decisions when trading, investing, or participating in DeFi activities.