A liquidity provider by definition is an entity that allows clients to hedge their risks. It connects various brokers, banks, hedge funds, also traders and other financial institutions, increasing the liquidity of the joint market.
The more clients a liquidity provider is servicing the better offer can be delivered. Desired is a higher liquidity as it decreases the spread as well as the cost of trading. Liquidity providers act at both ends of given asset transactions. They sell and buy certain financial instruments at certain prices. It means that they become the direct counterparties for all executed trades with the clients. Therefore the liquidity providers guarantee the prices at which all the transactions were hedged.