Liquidity Provision & Impermanent Loss

Liquidity providers (LPs) deposit equal value of two tokens into a pool and receive LP tokens representing their share. They earn a portion of trading fees (typically 0.3% per swap). However, LPs face impermanent loss: if the price ratio changes, the LP's position is worth less than if they had simply held the tokens. The loss becomes 'permanent' only when you withdraw. For a 2x price change, impermanent loss is about 5.7%. This is offset by trading fees in active pools.