How Does a Yield Farming Reward (LP Token) Interact with Impermanent Loss?

Yield farming rewards, often paid in a protocol's governance token, are an incentive layer designed to attract liquidity. These rewards are paid in addition to the trading fees and are intended to offset or exceed any potential impermanent loss.

The high Annual Percentage Rate (APR) from these rewards can often make providing liquidity profitable, even with significant IL.