Treat liquidity provision as inventory management
Compare earned fees with changing asset exposure, adverse selection and exit costs.
✨ Aprende con IA
Start with: liquidity, mev, dexes.
Objective
Offer trading inventory in exchange for possible fees while accepting changes in the assets you hold.
Prerequisites and assumptions
You understand both assets, the pool design and how to remove the position. You can monitor a chosen range when using concentrated liquidity. You compare results with holding the same starting assets.
Mechanics
Traders exchange against the pool and alter its inventory. Your claim changes accordingly. In range-based designs, only active liquidity earns swap fees; outside the chosen range you can become concentrated in one asset.
Approaches and tradeoffs
| Choice | Potential benefit | Trade-off |
|---|---|---|
| Broad range | Usually needs less intervention | Spreads capital across more prices |
| Narrow range | Concentrates exposure and fee opportunities | More likely to become inactive |
| Rebalance | Restores a chosen range or inventory | Adds a trade, fees and new price exposure |
Risks
Price movement, adverse selection, contract bugs, depegs and MEV can reduce returns. Fee income can be lower than the loss relative to holding. A receipt token or position NFT may itself carry transfer or operator permissions.
Example
For a simple constant-product, full-range pool with no fees, a doubling of one asset’s relative price produces roughly 5.7% less value than holding the starting assets. This comparison assumes the basic model and says nothing about profit in dollars. Concentrated positions behave differently and can diverge more.
note — Fee income is only one line in the result. Compare the final assets and value with holding the same starting inventory.
When it may not make sense
It may not make sense if you need a fixed asset mix, cannot monitor the chosen design, or would be uncomfortable holding only one asset after a price move. Track deposits, withdrawals, fees and the holding benchmark rather than judging by fee income alone.