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💧 Providing Liquidity: Earn Trading Fees

Learn how liquidity providers earn 0.3% of every swap

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💧 Providing Liquidity to AMMs

Liquidity providers (LPs) are the backbone of AMMs. They deposit tokens into pools and earn trading fees, but face a unique risk called impermanent loss. Understanding this tradeoff is crucial for successful liquidity provision.

How Liquidity Provision Works

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Deposit Both Tokens

LPs must deposit equal values of both tokens (e.g., $500 of Token A + $500 of Token B). This maintains the pool's balance.

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Receive LP Tokens

In return, you get LP tokens representing your share of the pool. These track your ownership percentage.

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Earn Trading Fees

Every trade pays a small fee (typically 0.3%) which is distributed to LPs proportional to their share.

🎮 Interactive: Impermanent Loss Calculator

Adjust prices to see how impermanent loss affects your position:

If You Held (HODLed)
$2000.00
Original tokens value
As LP in Pool
$2000.00
Pool position value
Impermanent Loss
0.00%
No loss
Price Change
+0.00%
Est. Annual Fees
$10.95
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Note: Impermanent loss is "impermanent" because it only becomes permanent if you withdraw. If the price returns to the initial level, the loss disappears. Trading fees may offset impermanent loss over time.

Understanding Impermanent Loss

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What Is It?

When token prices diverge from when you deposited, you have less value than if you had just held the tokens. This is because the AMM rebalances your position.

Example: If one token 2x in price, you'll have ~5.7% less value than holding.
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Fee Compensation

Trading fees accumulate over time and can offset or exceed impermanent loss, especially in high-volume pairs.

Strategy: Provide liquidity to stable or correlated pairs to minimize IL risk.
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Impermanent Loss Formula

The impermanent loss can be calculated mathematically based on price ratio changes:

IL = 2 × √(price_ratio) / (1 + price_ratio) - 1
Price Ratio Examples:
• 1.25x price change = -0.6% IL
• 1.50x price change = -2.0% IL
• 2.00x price change = -5.7% IL
• 5.00x price change = -25.5% IL

Best Practices for LPs

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Choose Stable Pairs

Stablecoin pairs (USDC/DAI) or correlated assets (ETH/stETH) minimize impermanent loss.

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Monitor Volume

High-volume pairs generate more fees, which can offset impermanent loss faster.

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Long-Term Thinking

Fees accumulate over time. Longer provision periods increase chances of profitability.

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Calculate Break-Even

Know at what fee threshold you break even on impermanent loss for your chosen pair.