Where Do LP Fees Come From?
Become an LP, watch fees stay in the pool, and see how trade direction changes the inventory you own.
- Explain LP shares as proportional ownership of reserves
- Put fee income and inventory change on the same ledger
- Compare an LP position with a hold-only baseline
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Become an LP, watch fees stay in the pool, and see how trade direction changes the inventory you own.
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Think about these questions first.
Choose an answer before opening the explanation. You can add anything unexpected to your review list.
Q01LPs earn every trade fee. How can they still underperform holding?＋
Trades continuously change the LP’s asset mix. Fees add value, but the pool tends to sell the rising asset and buy the falling one; performance must be compared with the counterfactual of simply holding.
Being an LP is not the same as putting assets in a savings account. You hand both assets to a pool and receive proportional ownership of future inventory; fees can grow that inventory while trade direction changes the mix you withdraw.
What does an LP share represent?
Deposit both assets near the current ratio and the system mints LP shares. A share is not a fixed number of TOKEN; it is a percentage of the pool’s total reserves.
Credits / TOKEN
The pool does not wait for another order. Its reserve ratio produces the next quote.
Swap fees stay in the pool and slowly grow k; adding or removing liquidity also changes the reserve scale.
What does your share represent now?
Deposit the suggested ratio, execute a few trades, and value your pool position against a hold-only baseline.
Start with the two reserves, then drag the swap size. Small trades stay near the spot price; large trades travel farther along the curve.
- 01
Pool created: 120,000 credits + 1,000 TOKEN，initial price 120 credits / TOKEN。
Use the slider to return to an earlier step. Continuing from there replaces the later history with a new sequence.
Deposit the suggested ratio, then execute a credit-for-TOKEN swap. Your ownership percentage stays the same, but the inventory represented by that percentage changes.
Keep two ledgers for an LP
The lab compares the value of your current LP position (withdrawable reserves valued at the current spot price) with a hold-only baseline (the original deposit held in a wallet). The gap contains fees, curve effects, and inventory rebalancing. It is not a full accounting statement, but it shows why fee income alone is not enough.
Expand: how this step works
sharesFromX = amountX × totalShares / reserveX
sharesFromY = amountY × totalShares / reserveY
shares = min(floor(sharesFromX), floor(sharesFromY))
withdrawX = reserveX × shares / totalShares
withdrawY = reserveY × shares / totalShares
Real contracts also handle locked initial liquidity, donated assets, rounding, and minimum deposits. Every rounding direction can affect long-run fairness and conservation.