This article introduces the LPs and how to capture bullish and bearish signals via its metric.
The Liquidity Providers metric refers to the number of addresses that have provided liquidity to a particular token’s trading pairs on decentralized exchanges in a set time.
For example, suppose 1,000 addresses are providing liquidity to examplecoin’s trading pairs on DEXs. The number of LPs would be 1,000. If 500 new addresses added liquidity and 300 removed all the liquidity on the following day, the LPs number would change to 1,200 (1,000+500-300).
How can I use it?
Firstly, you should understand that liquidity providers play a critical role in DEX trading.
A liquidity provider (LP) is a user that funds a liquidity pool with cryptocurrency assets. Namely, LPs need to have the tokens first and then deposit them into the relevant liquidity pools so that others can trade. Hence, without enough LPs to provide liquidity, traders could not enjoy fluent and stable transactions on DEXs. Moreover, LPs are rewarded with the token’s trading fee based on the proportion of the liquidity they provided in the total liquidity pool.
As LPs are essential, significant changes in the LPs number can indicate potential bullish or bearish market trends.
Identify bullish and bearish signals
A growing number of addresses are providing liquidity to a token’s trading pairs on DEX.
More traders are willing to deposit the particular token into trading pairs. This is because they believe more trades will occur so that they can earn the fee rewards. Generally, it could be explained as a consensus of the long-term value of this token.
Meanwhile, an increasing number of LPs can benefit from a specific token’s liquidity, enabling traders to swap different assets with a minor slippage.
A declining number of addresses are providing liquidity to a token’s trading pairs on DEX.
Firstly, if users remove the liquidity of a particular token from liquidity pools, they would probably sell these tokens after that. Secondly, it can reduce the public’s confidence as LPs are not optimistic about continuing staking tokens. In addition, decreasing LPs may cause a lack of liquidity and make switching assets’ slippage larger.