FOLLOW THE MECHANISM
- 1Deposit
- 2Trade
Swaps reshape inventory and accrue fees under pool rules.
- 3Redeem
The claim returns its share of current inventory.
A conceptual sequence. Real implementations can add steps, intermediaries, and conditions.
What a pool share represents
In a simple full-range two-asset pool, a liquidity provider contributes both reserve assets and receives a proportional claim on the pool. When traders swap, the pool’s inventory changes. Redeeming a share therefore returns a fraction of the then-current reserves, not necessarily the quantities originally deposited. Uniswap v2 uses fungible pool tokens for this accounting. Concentrated-liquidity versions represent positions differently, because each position can specify its own active price interval.
How fees reach providers
Traders pay for executing against the supplied inventory. Depending on the protocol, fees remain in reserves, accrue to a position or are collected separately, and some may go to the protocol. In a simplified pool where all fees remain, a provider with 10% of shares has 10% of the claim on the growing reserves. That does not mean 10% of each future fee is guaranteed: ownership changes, activity changes and the fee policy may change within the protocol’s rules.
The inventory trade-off
When one asset rises relative to the other in outside markets, arbitrageurs can buy it from a pool until its quoted price adjusts. LPs tend to end up holding less of the asset that rose and more of the one that fell relative to it. Fees compensate for supplying liquidity, but are not automatically larger than this relative underperformance. A pool position may rise in dollar value while still do worse than holding its initial token quantities outside the pool.
What can block or reduce an exit
Withdrawal normally burns or updates the LP claim and releases the relevant inventory. An out-of-range concentrated position ordinarily remains withdrawable; it holds one asset and stops earning active swap fees until the price returns to its range. Separate restrictions can arise when an LP token is locked in a rewards contract, a token limits transfers or contracts fail. Selling withdrawn assets can also incur costs. Map the full path from original assets to pool claim to any wrapper before treating a balance as immediately accessible.
MAKE IT CONCRETE
A share rather than a fixed basket
A provider owns 5% of a simulated pool. If reserves are now 80 A and 12,000 B, the proportional claim is 4 A and 600 B, before exit costs, regardless of the original deposit mix.
FAILURE PATHS & COMMON MISREADINGS
Where the model can break
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