What a bank would do — and what you do instead
At a bank, the lending desk decides who borrows and keeps the spread between what borrowers pay and what savers earn. When you supply assets to a lending pool or trading pool, you are taking the desk’s seat — and its risks. Understanding how the desk earns its money tells you where your yield comes from, when it will shrink and when you might not be able to get your money back quickly.
How LPs earn
Impermanent loss, simply
Suppose you supply equal values of ETH and USDC. If ETH rises, traders buy ETH from the pool, leaving you with less ETH and more USDC than you started with. You still gain, but less than if you had held the original ETH. If prices return to where they started, the gap closes — that is the “impermanent” part. If you withdraw while prices differ, the loss becomes permanent.
Concentrated liquidity
In V3 and V4 you choose a price range. A narrow range earns more fees while price stays inside it, but stops earning — and is fully converted to one token — when price leaves. It behaves more like active trading than passive savings.
Frequently asked questions
Is LPing the same as lending?
No. Lenders are paid interest by borrowers. LPs are paid swap fees by traders and take on price-movement risk between two tokens.
Does the fee switch reduce LP income?
Yes, on pools where it applies, a portion of fees goes to the protocol instead of LPs.
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