I’ve learned a unique quirk about liquidity pools and wanted to share what I’ve figured out.
How are LP rewards actually calculated, and what drives profit?
I used Blockscout to estimate the size of the liquidity pool on Mordor and determine what percentage of it I own. It turns out I’m sitting on about 57% of the pool — but I wasn’t seeing meaningful rewards.
So I dug into the formulas (from the blog) and ran them through AI to better understand what’s going on. Here’s the simplified version:
LP Profit ≈ DEX Fees − Impermanent Loss
Now here’s the counterintuitive part:
Impermanent loss increases when price moves — even if the token goes up.
At first, that doesn’t make sense. You’d think if the token price increases, LP holders should benefit. But that’s not how AMMs work.
As a liquidity provider, you’re constantly being rebalanced by the AMM:
-
When price goes up → the pool sells your appreciating token
-
When price goes down → the pool buys more of it
This keeps the pool balanced, but it means:
You’re effectively selling winners and buying losers automatically
That rebalancing is what creates impermanent loss.
Yes, you earn a portion of DEX fees from every swap — but:
If fees < impermanent loss, you’re not actually making money.
Key takeaway:
Liquidity pools hate volatility
Liquidity providers need consistent volume, not wild price swings
So what actually makes money in a liquidity pool?
Volume.
High, steady trading activity (with relatively stable prices) is where LPs finally start to profit.
Reality check (Mordor):
From what I can see on Blockscout:
-
Only ~1–2 swaps per day
-
Very low trading volume
At this level of activity:
There simply aren’t enough fees being generated
LP providers are unlikely to see meaningful rewards
If anyone sees this differently or has additional data, I’d love to compare notes — still learning this space.