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Liquidity Providers add liquidity in collateral (currently USDC) to get exposure to net trader profit and loss, trading fees, and skew impact fees. LPs remove liquidity by redeeming and burning their liquidity tokens.
Trading fees are reinvested in the pool and auto compound. Since LPs’ liquidity token holdings represent pro rata ownership of a pool, they realize gains and losses by redeeming part or all of their liquidity tokens.
LPs take on impermanent loss risk that their funds might be used to pay out positive trader PnL. However, LPs also take on the reward that traders might have neutral or negative PnL.
Last modified 9mo ago