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What Is the Risk-Reward Tradeoff for a Liquidity Provider?

Earning fees versus the risk of impermanent loss from asset price divergence.
Greeks.Live28.10.25

What Is the Risk-Reward Tradeoff for a Liquidity Provider?

Liquidity providers (LPs) earn trading fees as a reward for supplying assets to a decentralized exchange (DEX) pool. The primary risk is impermanent loss, which occurs when the price of the deposited assets changes compared to simply holding them.

LPs essentially sell volatility and earn fees. If asset prices diverge significantly, the loss from impermanent loss can outweigh the earned fees.

This creates a balanced risk-reward profile dependent on market volatility and trading volume.

How Does the Concept of “Impermanent Loss” Relate to Staking?
What Is ‘Impermanent Loss’ and How Does It Affect Liquidity Providers in the Network?
What Is Impermanent Loss and How Is It Calculated?
How Does a “Hidden Bullish Divergence” Differ from a Standard Bearish Divergence?

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