How Liquidity Providers Earn on Decentralized Exchanges Explained

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Liquidity providers (LPs) earn income on decentralized exchanges (DEXes) by depositing token pairs into liquidity pools, enabling users to swap assets. For every swap, LPs receive a fee — typically 0.05% for stablecoins, 0.3% for major tokens, and 1% for exotic assets — along with platform incentives. To open a position, an LP deposits tokens into a chosen pool within a specified price range and receives an NFT representing their position details. Returns can be estimated using either a basic formula, which assumes trading at any price, or a concentration formula focused on a specific price range. Key variables affecting earnings include pool trading volume, the fee tier, and the LP's share of the pool's total value locked (TVL).

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