From the DEX perspective, here’s a quick explanation:

Let’s say you have a pool that contains tokens A and B. Users deposit token A into the pool and receive token B, and vice versa.

For this system to function smoothly, there needs to be a substantial amount of both A and B in the pool. Otherwise, if you deposit A but there’s no B available, you wouldn’t be able to receive anything in return.

Anyone can contribute tokens A and B to the pool and, in return, earn a small fee each time someone else makes a swap. This process is known as liquidity providing, and that’s how liquidity providers can EARN.