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What Is the Incentive Structure for a Liquidity Provider (LP) in a Typical AMM?

LPs are incentivized by a share of trading fees and often by additional 'yield farming' rewards (governance tokens) to offset Impermanent Loss risk.
Greeks.Live12.11.25

What Is the Incentive Structure for a Liquidity Provider (LP) in a Typical AMM?

The primary incentive for a Liquidity Provider (LP) is to earn a share of the trading fees generated by the swaps that occur in their pool. These fees are typically a small percentage of each transaction.

Additionally, many protocols offer governance tokens or other rewards, known as 'yield farming' incentives, to bootstrap liquidity. The total return must outweigh the risk of Impermanent Loss.

What Is the Breakeven Point Where Fees Offset Impermanent Loss?
What Is a ‘MEV-Share’ Protocol and How Does It Redistribute MEV?
How Does “Impermanent Loss” in a DEX Liquidity Pool Relate to the Effective Cost of Trading (Spread)?
What Is the Primary Mechanism That Offsets Impermanent Loss for Liquidity Providers?

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