Providing liquidity

Every DEX swap trades against a pool of two tokens. The people who deposit those tokens are liquidity providers (LPs), and they earn a share of every trade's fee. It can be lucrative, but the risks are less obvious than lending.

How a pool prices trades

The classic design is the constant product formula: the pool keeps the product of its two balances constant (x × y = k). When someone buys token X, the pool's X balance shrinks and its price rises along the curve. That's why large trades have price impact.

Impermanent loss

Because the pool always rebalances toward the cheaper token, LPs end up holding more of whatever fell and less of whatever rose. Compared with simply holding the two tokens, you're behind. That gap is impermanent loss (IL): impermanent because it shrinks if prices return, permanent if you withdraw while they're apart.

Price change	IL vs holding (full range)
+25% / −25%	about 0.6% / 1.0%
2× or ½×	about 5.7%
4× or ¼×	about 20%

Fees have to outrun IL for LPing to beat holding.

ToolImpermanent lossHow much you'd lose versus holding if the price moves.

Concentrated liquidity

Full-range pools spread your capital across every price from zero to infinity, so most of it sits idle. Concentrated liquidity lets you choose a range. Inside it, your capital works many times harder and earns far more fees. Outside it, you earn nothing and hold 100% of one token.

On Solana:

• OrcaConcentrated liquidity with a clean interface
• RaydiumSolana's longest-running AMM and launchpad
• MeteoraDynamic liquidity for active LPs and launches

• Orca Whirlpools and Raydium CLMM use price ranges with fixed or adaptive fee tiers.
• Meteora DLMM splits liquidity into discrete price bins, with fees that rise automatically when volatility spikes, plus strategy shapes (spot, curve, bid-ask).

Choosing a pair

• Correlated pairs (JitoSOL-SOL, USDC-USDT): low IL, low fees, steady.
• Major pairs (SOL-USDC): solid fees, real IL; best with a range you actively manage.
• New tokens: huge fees and huge risk; the token can go to zero and take your position with it.

Let someone else manage it

Narrow ranges need rebalancing. Kamino Liquidity vaults and Meteora's tools manage ranges automatically for a fee. You give up some upside for not having to watch charts.