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Liquidity Providers in Decentralized Exchanges

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Liquidity Providers in Decentralized Exchanges

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Questions and Answers

What is the primary way liquidity providers (LPs) earn income in decentralized exchanges?

By investing in the governance of the platform

By holding a significant amount of one asset

By trading assets directly on the platform

By supplying money to liquidity pools (correct)

What do liquidity providers need to hold in a liquidity pool?

Cash reserves only

An equal value of two different assets (correct)

Two different assets with unequal value

A single digital asset

What type of fees do LPs earn from their contributions to decentralized exchanges?

Withdrawal fees from the liquidity pool

Transaction execution fees only

Deposit fees for entering the liquidity pool

Trading fees generated by users (correct)

Which of the following protocols is known for liquidity provisioning?

<p>Pancakeswap</p> Signup and view all the answers

Which of the following is NOT a method used by LPs to generate profits?

<p>Participating in governance voting</p> Signup and view all the answers

Study Notes

Liquidity Providers and Decentralized Exchanges

Liquidity providers (LPs) supply funds to decentralized exchanges (DEXs), specifically automated market makers (AMMs).
LPs contribute liquidity by holding equal values of two different assets in a designated "liquidity pool."

Earnings and Rewards

LPs earn fees generated from trading activities within the liquidity pool.
The trading fees provided as rewards are proportional to the amount of liquidity each LP contributes.

Popular Protocols

Pancakeswap and Uniswap are leading platforms for liquidity provisioning, allowing users to trade assets seamlessly while LPs earn fees.

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Description

Explore the role of liquidity providers (LPs) in decentralized exchanges (DEXs) like Pancakeswap and Uniswap. This quiz covers how LPs earn fees by contributing to liquidity pools and the mechanics of automated market makers (AMMs). Test your knowledge on liquidity provisioning and trading fees.