What Role Does Transaction Fee Play in Incentivizing Liquidity Providers to Absorb Impermanent Loss?

Transaction fees are the primary reward for LPs. They are collected from every trade executed through the pool and distributed proportionally to LPs.

These fees act as compensation for the risk of impermanent loss. In a healthy, high-volume pool, the accrued trading fees often exceed the impermanent loss, making the LP position profitable overall, despite the price divergence risk.