Liquidity providers
LPs lend neither a fixed quantity nor a guaranteed return: they hold a claim on inventory that traders continually reshape.
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A USEFUL DISTINCTION
Holding vs providing liquidity
Compare final wealth using the same starting assets and final prices.
| Look at | Hold the starting assets | Provide liquidity |
|---|---|---|
| Inventory | Starting quantities remain unchanged. | Trades change the quantities held by the pool. |
| Revenue | No swap fees from simply holding. | May earn fees and separately offered incentives. |
| Price exposure | Retains the original relative exposure. | For a full-range constant-product pool, inventory rebalances as relative prices move. |
| Comparison | A benchmark, not a risk-free position. | May underperform that benchmark even when its fiat value rises. |
| Additional risk | Asset price, custody, and token-specific risks. | Those risks plus pool contracts and position-specific mechanics. |
Uniswap developer documentation contributors · How Uniswap Works ↗Checked 13 Nov 2026Uniswap developer documentation contributors · Fees across Uniswap versions ↗Checked 13 Nov 2026Hayden Adams, Noah Zinsmeister and Dan Robinson · Uniswap v2 Core ↗Checked 13 Nov 2026Aave documentation contributors · Aave V3 Incentives ↗Checked 13 Nov 2026Bank for International Settlements, Working Paper 1066 · The Technology of Decentralized Finance (DeFi) ↗Checked 13 Nov 2026
THE KEY DISTINCTION
What to carry forward
Divergence loss excludes fee income in the basic model. Fees can offset it, but there is no general guarantee that they will.
MAKE IT CONCRETE
A worked perspective
If one asset doubles relative to the other, the no-fee full-range constant-product model ends about 5.72% below holding the original equal-value assets.
Try the labFollow the underlying mechanisms
LP inventory and divergence loss
Divergence loss compares a pool position with holding its original assets. It is a benchmark difference, not a separate fee.
Yield farming and incentives
A displayed yield can combine fees, interest and token subsidies. Trace each source before combining the numbers.