By the end of this lesson you’ll be able to tell a pool that pays from trading from one that pays from printing. You’ll know what a 2021 study found when it added up liquidity providers’ results, what a price range does to the job, and the one question that separates a real yield from a promotion.
Two incomes, one word
A liquidity provider’s income has a fee side and an incentive side, and the word “yield” covers both.
The fee side
Fees are paid in the tokens being traded, by people who want to trade.
The incentive side
Incentives are a project paying in its own token to attract deposits.
Lesson 3 of How DeFi Works worked through the fee side, including impermanent loss for seven price moves, and called the incentive side what it is: a promotion rather than a rate. This lesson picks up from there: what providers actually earned once it was added up, what a price range does, and what sits between you and the pool when you use a vault.
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