{
  "id": 167599,
  "title": "Understanding DeFi 1: Providing Liquidity",
  "url": "https://urgent.news/2026/08/05/understanding-defi-1-providing-liquidity",
  "topic": "culture",
  "section": "Culture",
  "published": "2026-08-05T09:01:50.000Z",
  "source": {
    "name": "Dev.to",
    "slug": "dev-to",
    "url": "https://dev.to/kayis/understanding-defi-1-providing-liquidity-2kkj"
  },
  "original_language": "en",
  "account": "Decentralized exchanges (DEXes) offer alternative ways to generate income in the crypto market beyond simply buying and holding tokens. One such opportunity is providing liquidity on DEXes, which involves depositing tokens into liquidity pools that enable users to trade between different assets. This article explains how liquidity providers (LPs) make money through this process.\n\nTo begin with, LPs contribute tokens to a liquidity pool, typically a pair of tokens that can be swapped on the DEX. In return for facilitating these swaps, LPs receive a share of the trading fees generated by the pool. The specific fee percentage depends on the types of tokens involved in the pool. Stablecoins such as USDC or USDT usually offer lower fees around 0.05%, while more volatile tokens like BTC or ETH may yield higher fees of up to 1%. Less common tokens, such as memecoins, often have even higher fees but come with increased risk.\n\nTo participate, an LP opens a position within a selected pool by specifying the amount of tokens they wish to contribute and the desired price range. Once positioned, the LP receives a position NFT that records the details of their investment. When they decide to exit their position, they return the NFT to the pool, at which point their original tokens are returned, along with any earnings accrued during the period.\n\nEstimating potential returns from liquidity provision involves two primary formulas: the basic formula and the concentration formula. The basic formula is most suitable when an LP is willing to accept any price range for their swaps, essentially making it an unconcentrated approach. This formula calculates earned fees by multiplying the pool's trading volume, the fee tier percentage, and the ratio of provided liquidity to the total value locked (TVL) in the pool.\n\nThe Pool Trading Volume represents the total USD value of tokens traded within a given timeframe, usually 24 hours or one year. Higher trading volumes indicate greater liquidity and thus more frequent opportunities for earning fees. Fee tiers denote the percentage cut taken by the DEX for each swap executed within a specific pool. LPs benefit from higher fee tiers, though they must weigh this against the risk associated with providing liquidity for more volatile assets. Finally, Total Value Locked signifies the cumulative value of all tokens deposited into a pool, including those provided directly by LPs.\n\nWhile the concentration formula offers precise calculations of earnings within a specific price range, the basic formula provides a simplified view of potential returns without accounting for price fluctuations. An example return estimation using these formulas is illustrated with data from the Sushiswap USDC/ETH pool on the Katana network, demonstrating how LPs can expect modest daily earnings even with relatively small investments.",
  "summary": "This article is based on Understanding DeFi - Dexes by Katana / BillyJitsu The most straightforward way to make money in crypto is to buy a token and sell it when its value rises. However, token values fluctuate, so you might not sell at the right time. If you faced that issue in the past, you might be interested in other earning opportunities, such as providing liquidity on a decentralized…",
  "key_points": [
    "Liquidity providers deposit tokens into DEX liquidity pools.",
    "Earn fees through trading activity, varying by token volatility.",
    "Use basic or concentration formulas to estimate potential returns."
  ],
  "editors_take": null,
  "illustration": "https://urgent.news/ill/167599.png",
  "coverage": {
    "outlets": 1,
    "also_reported_by": []
  },
  "ai_generated": true,
  "disclaimer": "Summaries, key points and the editor’s take are written by software from other outlets’ reporting and may contain errors — always check the linked original."
}