ROUTE 04 / Start here
I provide liquidity
See why earning fees also means holding a changing inventory.
In a liquidity pool, deposited assets are actively traded against. Earning swap fees and keeping the original quantities of both assets are different outcomes. Work through the price rule, the changing inventory, and a meaningful comparison with simply holding.
- 01
Identify the venue
A decentralized exchange is an execution system; its interface, routing, and contracts have separate roles.
- 02
Read the pricing rule
A simple pool prices a trade from reserves rather than a list of limit orders.
- 03
Price impact and slippage
Understand the execution gap
The trade itself changes the pool; other changes between quote and execution are a separate issue.
- 04
Own a share of inventory
Depositors receive a claim on the pool’s current reserves, subject to the particular design.
- 05
LP inventory and divergence loss
Choose a comparison
Measure the pool inventory against holding the starting assets at the same final prices.
- 06
Yield farming and incentives
Separate fees from incentives
Token rewards can change the result, but bring their own price, dilution, and program risks.
CHECK YOUR UNDERSTANDING
Can a pool position rise in fiat value and still underperform holding?
Reveal the explanation
Yes. Divergence loss compares two strategies at the same final prices. Both can gain in fiat terms while the pool ends with less value than the original assets would have had.