Too Long; Didn't Read
DeFi protocols live on liquidity and have built economic incentives for anyone willing to add liquidity to their platform. In exchange, protocols often provide you with liquidity provider (LP) tokens that are representative of partial ownership of that pool. The value of LP tokens is dependent on 3 main variables: price gain of tokens in the pool, impermanent loss, fees earned and distributed by the pool to LP token holders. In this article, we break down the factors affecting profitability, explore the trade-offs, and learn about the diverse range of risk-return profiles.