Unit 1 · Level 3 · AMMs & DEXes
Being an LP
Every swap pays a small fee (0.3% on Uniswap's classic pools), and that fee doesn't go to a company. It goes to the people who filled the pot: the liquidity providers. Deposit both tokens of a pair in equal value and you receive LP tokens, a receipt for your slice of the pool. From then on, every trade anyone makes drips a tiny fee into your slice.
Free to play. No ads, no token, no account needed to start.
What you get asked
What do LP tokens actually represent?
Burn your LP tokens and the pool hands back your share of both assets, fees included. Lose the LP tokens and you lose the claim, so treat them like the deposit slip they are.
To join a classic pool, an LP deposits ___ tokens of the pair, in roughly equal value.
A €2,000 deposit into an ETH/EUR pool means about €1,000 of ETH plus €1,000 of stablecoins. The pool needs both sides stocked to serve traders in both directions.
A pool handles €1,000,000 of swaps in a day at a 0.3% fee, so €3,000 in fees. You own 1% of the pool. How many euros in fees did you earn that day?
1% of €3,000 = €30. Notice what drives it: volume, not price. A pool that trades a lot pays a lot; a quiet pool pays almost nothing.
Match each LP concept to its meaning:
Depth is comfort for traders and competition for LPs: the deeper the pool, the smaller each LP's slice of the same fees.
An LP dashboard shows '12% APY'. Where does that money actually come from?
Ask it every time: where does the yield come from? For a plain pool the answer is honest (trader fees), which also means the APY falls when volume dries up. 🐜
The rest of this unit
How a pot of tokens and one formula replaced the order book.