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What is a liquidity provider?

Depositing both tokens into a pool, earning a share of every fee, and the divergence loss that comes with it.

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Deposit both tokens, own a share

A liquidity provider (LP) deposits both of a pool's tokens and gets a share of the pool in return. On reel the share lives in a position account: it records the pool, the owner, how many shares the position holds and what it is owed.

Adds are proportional: you deposit both sides at the pool's current ratio, and the shares you get are set by whichever side is smaller. What you pay rounds up and the shares you get round down, so an add never dilutes the LPs already there. When a pool is first seeded, 1,000 shares are locked forever and belong to no position, so a pool can never be fully drained to zero shares.

Withdrawing burns shares and pays out your part of each real reserve, rounded down.

How fees reach a position

Fees are kept out of the reserves. Each LP fee raises the pool's fee growth per share, and each position remembers the figure it last settled at. The difference, times the position's shares, is what it has earned since.

That settles automatically before any change to the position's shares, and whenever its owner collects. Collecting pays the fees and leaves the deposit where it is, so a position that is locked still earns and can still collect.

Some income reaches LPs as a stream instead of all at once: King of the Pool releases and the LPs' part of arbitrage recapture are paid out evenly over a set time. A deposit made just before a large payment only shares in what streams after it joins, so liquidity that arrives for one block and leaves earns almost nothing from it.

Divergence loss

When the price moves, a constant-product pool sells the token that is rising and buys the one that is falling. An LP ends up holding more of whichever token went down. Compared with simply holding the two tokens, the position is worth less. This gap is called divergence loss (or impermanent loss, because it closes if the price returns).

Price change since you depositedPosition value versus holding
1.25× or 0.8×about 0.6% lower
2× or 0.5×about 5.7% lower
4× or 0.25×about 20% lower
10× or 0.1×about 42.5% lower

The figures follow from the curve alone: 2·√r / (1 + r) for a price ratio r. Fees earned are what offsets it. Whether they do depends on the pool's volume, its fees and how far the price moves, and nothing guarantees they will.

How Hook Blocks change what LPs earn

The base fee always goes 100% to LPs. A pool's Hook Blocks can add more, and each block says where its money goes:

  • LP Rewards adds a fee on buys for LPs, after the protocol's share.
  • Anti-Snipe charges early buyers a decaying tax, paid to LPs after the protocol's share.
  • Dynamic fees and Storm Fee raise the fee when the price moves fast, so LPs are paid more when divergence risk is highest. (A creator can send Storm Fee to the owner instead.)
  • Arb recapture charges the swap that closes a gap with other markets and streams what is left after the protocol, the gap opener and any pot to LPs.
  • The advisory surcharges (Market Guard, market hours, managed fee, agent tier) go 100% to LPs.

Other blocks pay the creator, holders, a pot or a burn instead. Read a pool's blocks before you deposit: they are frozen when the pool opens and never change.

Locks

A position's owner can lock it until a date or for good. A lock can only be extended, never shortened. A locked position still earns and collects fees; only the principal stays in the pool.

A launch's own positions are locked by the launch itself: until the last Anti-Snipe guard ends, or longer if the creator chose a dev-buy lock or a liquidity lock. The creator can also put the launch under a launch lock, which hands every fee to a beneficiary while the liquidity stays in its pools until a date or forever.

Risks to weigh

  • reel's program can still be upgraded by its upgrade authority, the reel treasury. A pool may have a deposit cap, which the admin can set or clear.
  • A quote token's issuer may hold a freeze authority (USDC has one) and could freeze a pool's vault. A pausable token stops swaps and withdrawals while paused.
  • Divergence loss can exceed fees, and a thin pool can move a long way on one trade.
  • Every transaction is final. Simulate before you sign, and check the amounts in your wallet's prompt.

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