How Does a Protocol’s Fee Structure Influence the Profitability of an LP Facing Impermanent Loss?
The protocol's fee structure directly determines the LP's income, which is the primary offset for impermanent loss. Higher transaction fees (e.g.
0.3% vs. 0.05%) lead to greater fee income for the LP for the same trading volume, making it more likely that the LP's net position (fees minus IL) will be profitable.
Conversely, very low fees require extremely high trading volume to break even. Some protocols also implement dynamic fees that adjust based on volatility, attempting to compensate LPs more during periods of high impermanent loss.
