Liquidity Provider
The challenge with order book exchanges lies in ensuring a consistent supply of liquidity for smooth trading. As illustrated in the previous section, a taker placing an order worth 100 USDC for 10 USDC would expect to receive 10 Tokens X. However, they may receive a different amount due to limited liquidity in the order book. To address this issue, ION introduces liquidity providers.
Liquidity providers on ION deposit their tokens into various bins, thereby populating the order book with liquidity. This system involves two key participant types:
Order Makers: These participants wish to sell their tokens at a specific price. They provide liquidity at that level by depositing their tokens into a bin corresponding to their desired price. When a taker executes a trade at this price, the order maker’s tokens are exchanged, and they receive the corresponding asset in return.
Liquidity Providers: Unlike order makers, liquidity providers contribute to the overall liquidity of the order book and earn transaction fees from trades. When their tokens are involved in a taker’s trade, they are converted to the opposite token type. The liquidity they provide remains in the bin, albeit in a different token form, depending on the active bin’s current position.
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