ARCIPEDIA · DEFI

Plain English

A liquidity provider (LP) is a user who deposits tokens into a DEX liquidity pool. In exchange, the LP earns a proportional share of all the trading fees the pool generates. Most pools require depositing equal value of both tokens in a pair.

How it actually works

When you provide liquidity, you receive an LP token representing your share of the pool. As traders swap and pay fees, the pool grows; your LP token represents a larger underlying value. To withdraw, you redeem the LP token back for your share of the pool. The risk: impermanent loss if the relative prices of the two tokens diverge.

What it means for you

LP positions are a yield strategy. Stable pools generate modest, low-risk fees. Volatile pools generate higher fees but expose you to impermanent loss and the price volatility of the underlying tokens. Sizing matters: LP positions are not equivalent to lending or staking risk-wise.

How ARCrypto teaches this

We walk through LP risk-reward analysis, the pools that actually pay risk-adjusted yield, and the strategies (range orders, single-sided liquidity, vault layers) that mitigate the structural downsides.

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Educational content only. Not investment, tax, or legal advice.