Liquidity Provision Agreement

A Liquidity Provision Agreement is a formal contract between a digital asset project or exchange and a specialized firm tasked with maintaining orderly markets for a specific token or derivative. The firm, often called a market maker, commits to quoting continuous buy and sell prices within specified ranges to ensure that traders can enter and exit positions with minimal slippage.

In exchange for this service, the market maker may receive fee discounts, direct payments, or token grants. These agreements are crucial for newly launched derivatives or tokens that lack sufficient natural market interest.

They help prevent extreme price volatility and ensure that the protocol remains functional for end-users. The agreement details the performance metrics, such as uptime and spread requirements, that the liquidity provider must meet.