Ever wondered where the tokens come from when you swap on Uniswap?
Answer: from Liquidity Pools — tokens deposited by regular users like you.
How It Works
LPs deposit token pairs (e.g., ETH + USDC). Traders swap against the pool, paying fees that are distributed to all LPs proportionally.
Impermanent Loss Quick Reference
| Price Change | Impermanent Loss |
|---|---|
| ±25% | 0.6% |
| ±50% | 2.0% |
| ±100% | 5.7% |
| ±200% | 13.4% |
| ±500% | 25.5% |
Warning
Impermanent Loss Is Real
If you LP in an ETH/USDC pool and ETH price swings wildly, your fee earnings may be less than impermanent loss. Before becoming an LP, ensure fee APR can cover potential impermanent loss.
Risk Reduction Strategies
- Start with stablecoin pools — USDC/USDT has near-zero impermanent loss
- Choose high-volume pools — more volume = more fees = easier to cover IL
- Understand concentrated liquidity — Uniswap V3/V4 increases capital efficiency but adds management complexity
Tip
Recommended Learning Path
- Start with Curve stablecoin pools (lowest risk)
- Then try Uniswap ETH/USDC full-range LP
- Graduate to concentrated liquidity when experienced
Conclusion
Liquidity pools are DeFi's infrastructure — without them, no decentralized trading exists.
As an LP, you're essentially market making — supporting trade fluidity with your capital in exchange for fee income. One of DeFi's most direct "make money work for you" methods, provided you understand impermanent loss.
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