I've read the official Tezos docs on liquidity baking. However these docs do not explain how the subsidy will be used, or what it's even for.
How will this subsidy be used, and how will liquidity providers benefit from the subsidy?
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When liquidity providers deposit tez and tzBTC they receive a liquidity token in return and when they redeem liquidity tokens they receive back tez and tzBTC. The subsidy means they will receive more back than they put in, which you can think of as a "reward" for providing liquidity. See this question for the actual calculations: how to calculate the value of a single LQT token for Liquidity Baking?.
In order for swap functionality to work, it must have funds. Instead of relying on regular users to send their tez to the LB pool, the Tezos protocol will now send 2.5 tez per block to this contract to generate the funding. Users can still send tez in exchange for LB rewards, but there's no guarantee people will, so modify the protocol to do it for you.