LP-side market making means the liquidity provider commits its own capital (usually stablecoins, sometimes the base token bought in the market) to quote alongside the project’s inventory, instead of quoting only with tokens and cash the project lends it. It gives deeper, more resilient order books and DEX pools than the project could fund alone, and aligns the provider with an orderly market rather than with extracting value through forced liquidations or one-sided selling. In return the provider expects a share of the economics: spread capture, a fee, a profit share, or a combination.
Key takeaways
- The provider puts its own balance sheet at risk next to yours, so the book can be deeper than your treasury alone allows.
- It is a commitment, not a donation: expect a fee, a profit share, or agreed terms.
- Ask exactly how much capital the provider commits, where (venues, pairs, pools), and for how long.
- Good LP-side providers avoid strategies that profit from pushing price into liquidation levels or dumping inventory.
How LP-side liquidity works
- Scope: agree venues, pairs (and pools), and depth targets.
- Capital commitment: the provider commits a stated amount of its own capital, usually stablecoins for the bid side; the project typically still provides some base-token inventory for the ask side.
- Quoting: the provider runs two-sided strategies across venues and keeps prices aligned between CEX order books and DEX pools.
- Economics: the provider earns spread and is compensated through an agreed fee or profit share.
- Reporting: balances per venue, split between project and provider, plus the usual KPIs.
Project inventory only vs LP-side
| Project inventory only | LP-side (provider capital added) | |
|---|---|---|
| Who funds the bid side | Project’s stablecoins | Provider’s capital plus project’s |
| Maximum depth | Limited by project treasury | Higher; set by both commitments |
| Provider’s incentive | Fee or options | Earn from a stable, two-sided market |
| Project’s capital at risk | All of the inventory | Shared with the provider |
| Typical cost structure | Retainer or loan + options | Fee and/or profit share |
When it makes sense
- A new listing where exchange and market expectations for depth exceed your stablecoin treasury.
- A token with an upcoming unlock where you want more resilient bids.
- Adding a second CEX or a perp market without spreading your own inventory too thin.
What to put in writing
- The amount of provider capital, per venue, and the minimum it will keep deployed.
- Whether the provider may withdraw capital during volatility, and with what notice.
- How profits and losses on the shared book are calculated and split.
- A prohibition on wash trading and self-trading.
Frequently asked questions
What is a liquidity provider in crypto?
A liquidity provider supplies buy and sell orders (on a CEX order book) or tokens to a pool (on a DEX) so that others can trade. A professional market maker is a liquidity provider that does this continuously and manages risk. See market maker vs liquidity provider.
How is LP-side market making different from a token loan?
In a token loan, the project supplies the inventory and the market maker is paid mainly through options. On the LP side, the provider adds its own capital to the market, so depth is not limited to what the project lends.
What does 'instead of relying on forced liquidations' mean?
Some trading firms profit by pushing thin markets toward levels where leveraged positions are liquidated, or by taking the other side of retail flow and extracting value. An LP-side partner that commits its own capital to two-sided quoting has a different goal: a stable, tradable market it can earn spread on.
Does an LP-side partner work on DEXs too?
Many do, providing concentrated liquidity on AMMs such as Uniswap v3 or on-chain order books. Ask which venues are covered and how DEX and CEX prices are kept in line. See DEX liquidity.
How do we verify the provider's capital is really there?
Ask for read-only access or reporting per venue showing the provider’s and the project’s balances separately, and for DEX positions, the on-chain addresses.