A Liquidity Provider (LP) is any entity that deposits tokens into an AMM pool and receives LP tokens representing their proportional ownership of the pool reser
Liquidity Provider (LP)
A Liquidity Provider (LP) is any entity that deposits tokens into an AMM pool and receives LP tokens representing their proportional ownership of the pool reserves. In return for providing inventory that traders can trade against, LPs earn a share of the swap fees generated by the pool. The LP’s return is: total fees earned plus the change in value of their deposited reserves minus impermanent loss (or LVR) and gas costs. LP profitability depends on pool selection (which pairs, which fee tier), position management (range width and rebalancing frequency in V3), and market conditions (volatility, volume, fee level). Passive LPs — those who deposit and forget — often underperform active managers in V3-style concentrated liquidity AMMs because inactive positions stop earning fees when the price moves outside their range. Professional market makers and DAOs increasingly dominate LP activity on major pools.
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