Intermediate level
Providing liquidity means depositing two tokens into a pool so traders can swap against them. You earn a share of the swap fees, and in return the pool keeps rebalancing your position: it sells whichever token is rising and buys whichever is falling. Fees are the income, impermanent loss is the cost, and in a concentrated pool the price range you choose magnifies both.
What an LP position is, and what it pays for
A liquidity pool is a pile of two tokens and a pricing formula. When you add liquidity you deposit both tokens in the pool’s current ratio, which for a classic 50/50 pool means equal dollar amounts of each. Every trader who swaps through the pool pays a fee, and that fee is shared among the liquidity providers in proportion to the liquidity they supply.
Look at it from the other side and an LP is a market maker. You stand ready to take the other side of every trade, quoting whatever price the formula says. Most of the time that is ordinary traders paying for convenience. Some of the time it is an arbitrageur who has seen the price move elsewhere first and is trading against your stale quote. The fees pay you for both. The second group is where impermanent loss comes from, and it is why fees are not free money.
Full range and concentrated pools
Full range
Uniswap v2 style pools and their many copies
- Always in range, so the position always earns its share of fees
- Fees are added to the pool’s reserves, so they compound automatically
- A fungible LP token represents your share, simple to hold and to account for
- Most of the capital sits at prices the pair will never trade at, so fees per dollar are low
Concentrated
Uniswap v3 and v4, Orca Whirlpools, Meteora DLMM
- You choose a price range, and all your capital works inside it
- Far more fees per dollar while the price stays in range
- Only in range liquidity earns; outside it you hold one token and earn nothing
- Each position is unique (an NFT on Uniswap), and fees accrue separately until you collect them
Concentrated pools usually let you choose a full range position too, which is a sensible way to start: you learn the interface and the accounting without having to manage a range. The mechanics of both designs, with the square root price math, are in AMM math.
Fee tiers, and who takes a cut
Uniswap v3 lets the same pair exist in several pools with different fees, and most concentrated liquidity DEXs copied the idea.
| Fee tier | Typical use |
|---|---|
| 0.01% | Stablecoin pairs |
| 0.05% | Major, highly liquid or closely correlated pairs |
| 0.30% | Most volatile pairs |
| 1.00% | Long tail and exotic pairs |
Uniswap v4, live since early 2025, drops fixed tiers: a pool can set any fee in steps of 0.0001%, and pools with hooks can use dynamic fees that change with conditions. Whatever the menu, the tier that matters is the one where the volume actually trades. A 1% pool that nobody routes through pays nothing.
Check who else shares the fee. Since the UNIfication governance proposal passed in December 2025, Uniswap takes a protocol fee on all v2 pools and on selected v3 pools: one sixth of the swap fee on v2 and on the 0.30% and 1% v3 tiers, and one quarter on the 0.01% and 0.05% tiers, according to its fee documentation:
| Pool | Swap fee paid by traders | LP share where the protocol fee is on |
|---|---|---|
| Uniswap v2 | 0.30% | 0.25% |
| Uniswap v3, 0.05% tier | 0.05% | 0.0375% |
| Uniswap v3, 0.30% tier | 0.30% | 0.25% |
| Uniswap v3, 1% tier | 1.00% | 0.8333% |
Other DEXs have their own splits, and some share fees with token stakers or voters. The pool page or the docs will say.
Impermanent loss, worked through
Put 2,000 dollars into a full range ETH and USDC pool with ETH at 3,000: that is 0.3333 ETH and 1,000 USDC. Now let the price move and compare the pool position with simply having held those two amounts. Fees are left out so the effect is visible on its own.
| ETH price | The pool now holds | Pool value | Value if held | Pool vs holding |
|---|---|---|---|---|
| 1,500 | 0.4714 ETH + 707.11 USDC | $1,414.21 | $1,500.00 | −5.72% |
| 2,500 | 0.3651 ETH + 912.87 USDC | $1,825.74 | $1,833.33 | −0.41% |
| 3,600 | 0.3043 ETH + 1,095.45 USDC | $2,190.89 | $2,200.00 | −0.41% |
| 4,500 | 0.2722 ETH + 1,224.74 USDC | $2,449.49 | $2,500.00 | −2.02% |
| 6,000 | 0.2357 ETH + 1,414.21 USDC | $2,828.43 | $3,000.00 | −5.72% |
Read the second column. As ETH rose, the pool sold ETH; as it fell, the pool bought ETH. That is the rebalancing, and it always leaves you with more of the asset that went down. The size of the loss depends only on the price ratio, not the direction: a doubling and a halving cost the same 5.72%. It is called impermanent because it disappears if the price returns to where you started, and it becomes permanent the moment you withdraw at a different price. The impermanent loss calculator runs any pair of prices and sets fees against the result.
Choosing a pair
| Pair type | Example | Impermanent loss | Main risk |
|---|---|---|---|
| Stable and stable | USDC and USDT | Near zero while both hold their peg | A depeg: the pool fills up with the failing coin |
| Correlated | ETH and a liquid staking token | Small, unless the two drift apart | The staking token trading at a discount (see liquid staking) |
| Volatile and stable | ETH and USDC, SOL and USDC | Moderate: the table above | A strong trend in either direction |
| New or thin tokens | A fresh launch paired with SOL or ETH | Can approach total | The token collapsing or being rugged |
The last row deserves a sentence of its own. When a token heads to zero, the pool keeps buying it with your good asset all the way down, so you exit holding almost entirely the token that failed. High headline fees on new pairs are payment for exactly that risk.
Choosing a range, and leaving it
Take the same 2,000 dollars and ETH at 3,000, but place it in a concentrated position from 2,500 to 3,600. Because 3,000 sits at the geometric middle of that range (2,500 × 3,600 = 3,000²), the deposit is still 0.3333 ETH and 1,000 USDC. The difference is depth: this position is about 11.5 times as deep as the same money spread across the full range (the narrower the range, the larger this multiple; AMM math derives it), so while the price stays inside it earns about 11.5 times the fees per dollar.
| ETH price | Concentrated, 2,500 to 3,600 | Full range | Just holding |
|---|---|---|---|
| 2,000 | $1,396.96 (all ETH, 0.6985) | $1,632.99 | $1,666.67 |
| 2,500 | $1,746.20 (all ETH) | $1,825.74 | $1,833.33 |
| 3,000 | $2,000.00 | $2,000.00 | $2,000.00 |
| 3,600 | $2,095.45 (all USDC) | $2,190.89 | $2,200.00 |
| 4,500 | $2,095.45 (all USDC) | $2,449.49 | $2,500.00 |
Above 3,600 the position has sold every ETH, at an average price of about 3,286 (the geometric mean of 3,000 and 3,600), and holds 2,095.45 USDC. It earns nothing until the price comes back. Below 2,500 it has bought ETH all the way down, at an average of about 2,739 (the geometric mean of 2,500 and 3,000), and holds 0.6985 ETH. At either edge it trails holding by 4.75%, against 0.41% for the full range position. Deeper means more exposed, by roughly the same multiple.
So range width is a trade. Narrow ranges earn more while in range, leave it more often, and need more rebalancing, and every rebalance means closing the position, which locks in the shortfall, then paying swap fees and gas to reopen. Wide ranges earn less and need less attention. For a first position, wider than feels necessary is the right instinct.
What fees to expect
Three things make the number on a dashboard less reliable than it looks.
- The window. Many dashboards annualize a single day of volume. In late September 2026, DefiLlama showed a 0.30% WETH and USDC pool on Base at about 87% on a one day basis and about 15% on a seven day basis. Same pool, same fee, different window. Tiny pools can print four digit figures off one busy day. Prefer seven and thirty day numbers.
- The average. In a concentrated pool the headline is an average across every LP, including those out of range. Your share is your in range liquidity divided by all in range liquidity, and professional LPs compete for the same fees.
- The gross. Fee APR is before impermanent loss. The honest scorecard is position value plus fees collected, against what holding would be worth today.
Rewards paid in a protocol’s own token are a separate number again; where that money comes from is the subject of where yield actually comes from.
A first small position, step by step
Pick a pair you would hold either side of
A position can end up entirely in either token. If you would not be comfortable holding all of one of them, choose a different pair.
Pick the pool where the volume is
Compare fee tiers for the pair on the DEX’s own pool pages or on DefiLlama. Look at seven day volume against liquidity, not the one day APR.
Choose the range on purpose
Write down the two edge prices and what you will hold at each. Start wide, or full range, for the first one.
Deposit a small amount from the right site
Type the DEX address yourself or use a saved bookmark. Approve only the tokens and amount you are depositing, and review approvals later with the token approvals guide.
Record it
Note the date, amounts and prices at deposit. You will need them to judge the position and for your tax records.
Check it against holding
After two weeks, add the position value and the fees earned, and compare with the value of the tokens you deposited. That one comparison teaches more than any APR.
Where the deeper treatment lives
Impermanent loss compares you with holding, but researchers have shown that the real cost of LPing is better measured against a strategy that rebalances at market prices, a measure called loss versus rebalancing. It explains why arbitrageurs are an LP’s true counterparty, how volatility and fees trade off, and when just in time liquidity takes the fees you expected. All of it is in LP as a strategy. For the formulas behind every number above, see AMM math.
Common questions
Can I lose money providing liquidity even when both tokens go up?
You can end up with less than holding would have given you. If both tokens rise by the same percentage, the ratio is unchanged and there is no impermanent loss. If one rises more than the other, the pool sells the stronger one, so you trail holding even though your dollar value may still be up.
What happens to my fees when the price leaves my range?
Fees you have already earned stay with the position and can be collected at any time. New fees stop accruing until the price moves back inside your range, or until you close the position and open a new one around the current price.
Is a stablecoin pool free of risk?
No. Impermanent loss is close to zero while both coins hold their peg, but if one depegs, the pool sells the healthy coin for the failing one. Smart contract risk applies as with any pool. The fees are low because the risk usually is.
Should I rebalance my concentrated position whenever it goes out of range?
Not automatically. Rebalancing locks in the shortfall against holding and costs gas and swap fees. Many LPs set a wider range and rebalance rarely. Decide your rule before you open the position, not while the price is moving.
Why are fees shown separately on a concentrated position?
Because in Uniswap v3 and v4 fees accumulate as a claimable balance tied to your position instead of being added to the pool’s reserves. They do not compound unless you collect them and add them back, which is a transaction of its own.
Where to go next
Next: Where yield actually comes from
Guide 8 of 16 in the Intermediate level. Your place is kept on this device, so you can pick up exactly here next time.