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Crypto Tip: A Liquidity Provider versus a Market Maker

Without getting twisted, Liquidity providers and market makers serve the same purpose but with some subtle differences.

They both provide liquidity which in turn determines the volumes of an exchange. Their roles are to ensure the pair has enough liquidity at any point in time, enabling seamless trading. 

Given their near overlapping roles, a market maker is easily identifiable because they are common in traditional cryptocurrency exchanges. They are high-volume traders that concurrently provide liquidity to multiple trading venues. Providers can include third-party entities—mostly hedge funds—and make their profits from bid-ask spreads.

A liquidity provider, on the other hand, is more specific to crypto. Because they get paid to supply liquidity, there are no third parties involved making trading trustless. Liquidity providers will make use of pools that provide markets for specific pairs. Interestingly, anyone can create pools, and everyone can supply liquidity—qualifying as liquidity providers—as long as they stake their assets in that pool.

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