# Liquidity Provision ⎊ Area ⎊ Resource 16

---

## What is the Provision of Liquidity Provision?

Liquidity provision is the act of supplying assets to a trading pool or automated market maker (AMM) to facilitate decentralized exchange operations. Liquidity providers enable other users to execute trades and earn a portion of the transaction fees generated by the pool. This activity is fundamental to the functioning of decentralized finance (DeFi) protocols.

## What is the Mechanism of Liquidity Provision?

In decentralized finance, liquidity provision typically involves depositing a pair of assets into a smart contract. The AMM algorithm uses this pool to determine pricing and execute swaps, maintaining a balance between the assets. The mechanism incentivizes users to provide capital by offering rewards, often in the form of trading fees and governance tokens.

## What is the Risk of Liquidity Provision?

The primary risk associated with liquidity provision is impermanent loss, which occurs when the price ratio of the deposited assets changes. This results in a lower value for the liquidity provider's share compared to simply holding the assets outside the pool. Impermanent loss must be carefully managed when calculating risk-adjusted returns.


---

## [Long Short Positions](https://term.greeks.live/term/long-short-positions/)

## [Batch Auction Systems](https://term.greeks.live/term/batch-auction-systems/)

## [Short Gamma Exposure](https://term.greeks.live/term/short-gamma-exposure/)

## [Perpetual Contracts](https://term.greeks.live/term/perpetual-contracts/)

## [Trustless Execution](https://term.greeks.live/term/trustless-execution/)

## [RFQ Systems](https://term.greeks.live/term/rfq-systems/)

## [Decentralized Exchange Liquidity](https://term.greeks.live/term/decentralized-exchange-liquidity/)

## [DeFi Risk Modeling](https://term.greeks.live/term/defi-risk-modeling/)

## [Risk Transfer Mechanism](https://term.greeks.live/term/risk-transfer-mechanism/)

## [Digital Asset Markets](https://term.greeks.live/term/digital-asset-markets/)

## [Decentralized Options Protocol](https://term.greeks.live/term/decentralized-options-protocol/)

## [Options Expiration](https://term.greeks.live/term/options-expiration/)

## [Order Execution](https://term.greeks.live/term/order-execution/)

## [Options Protocol](https://term.greeks.live/term/options-protocol/)

## [LP Tokens](https://term.greeks.live/term/lp-tokens/)

## [Collateral Haircut](https://term.greeks.live/term/collateral-haircut/)

## [Price Sensitivity](https://term.greeks.live/term/price-sensitivity/)

## [DeFi Protocol Architecture](https://term.greeks.live/term/defi-protocol-architecture/)

## [Dutch Auctions](https://term.greeks.live/term/dutch-auctions/)

## [Execution Environment](https://term.greeks.live/term/execution-environment/)

## [Trustless Computation](https://term.greeks.live/term/trustless-computation/)

## [Market Evolution](https://term.greeks.live/term/market-evolution/)

## [Proof Generation Cost](https://term.greeks.live/term/proof-generation-cost/)

## [Capital Velocity](https://term.greeks.live/term/capital-velocity/)

## [Asset Price Sensitivity](https://term.greeks.live/term/asset-price-sensitivity/)

## [Capital Efficiency Ratio](https://term.greeks.live/term/capital-efficiency-ratio/)

## [Capital Efficiency Constraints](https://term.greeks.live/term/capital-efficiency-constraints/)

## [Slippage Cost Calculation](https://term.greeks.live/term/slippage-cost-calculation/)

## [Liquidity Mining Incentives](https://term.greeks.live/term/liquidity-mining-incentives/)

## [Permissionless Access](https://term.greeks.live/term/permissionless-access/)

---

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```


---

**Original URL:** https://term.greeks.live/area/liquidity-provision/resource/16/