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How Do Trading Fees Mitigate the Impact of Impermanent Loss for Liquidity Providers?

Trading fees provide a yield that LPs use to offset the loss incurred from price divergence, potentially leading to a net profit.
Greeks.live05.12.25

How Do Trading Fees Mitigate the Impact of Impermanent Loss for Liquidity Providers?

Liquidity providers (LPs) earn a percentage fee on every trade executed through the pool. These accrued fees act as a yield on the LP's deposited assets.

If the total fees earned over the period of providing liquidity exceed the value lost due to impermanent loss (the difference between holding and pooling), the LP will still achieve a net profit. Essentially, the trading fees are the compensation LPs receive for taking on the risk of impermanent loss.

Can an AMM Be Subject to Impermanent Loss in a Derivatives Market?
How Do ‘Fee Earnings’ from the Pool Help Offset Impermanent Loss for the LP?
How Do Trading Fees Earned by the LP Offset the Effects of Impermanent Loss?
How Can an LP Use Options to Hedge against Impermanent Loss?
How Can High Trading Volume Potentially Offset Significant Impermanent Loss?
What Are the Primary Hedging Strategies Used by Liquidity Providers to Mitigate Impermanent Loss?
What Is the Risk of “Roll Yield” When Rolling a Futures Contract?
What Is the Risk of “Impermanent Loss” for Liquidity Providers in an AMM?

Glossar

Impermanent Loss

Exposure ⎊ Impermanent loss, a risk inherent in automated market maker (AMM) protocols and liquidity provision, arises from price divergence between assets deposited and their subsequent value upon withdrawal.

Trading Fees

Cost ⎊ Trading fees represent a quantifiable deduction from capital employed in executing strategies across cryptocurrency, options, and derivative markets, directly impacting net profitability and risk-adjusted returns.

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