Part 3. What Are Liquidity Pools? What Are Liquidity Providers ("LPs")?
This is the third in a 7-part series, "The Friendly Introduction to THORChain". Subscribe to be notified when the next chapter is released.
In this section, we give a simple explanation of "what are liquidity pools" and "what are liquidity providers" - key building blocks in the world of decentralized finance (DeFi) and THORChain.
Swapping on THORChain is made possible through "liquidity pools" - static pools of cryptoassets that other users in the network (called "liquidity providers" or "LPs" for short) deposit into the network for swappers to trade against, in exchange for yield on their assets in the form of LP fees and block rewards.
Every swap on THORChain incurs a small LP fee, which is then split amongst the LPs based on the amount of assets they've contributed to the pool.
In addition to LP fees, the THORChain protocol allocates a percentage of newly minted $RUNE tokens to be distributed amongst LPs regularly.
The combination of LP fees + block rewards provides ample incentive for users who seek to earn yield on their otherwise unproductive cryptoassets.