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Pool Fee Distribution
How are pool trading fees distributed amongst liquidity providers?
For every trade made using SumSwap, there is a 0.3% fee taken for swapping tokens. Any fees that are generated through SumSwap trading activity are automatically deposited back into the liquidity pool reserves, creating an auto-compounding effect for liquidity providers. This increases the value of liquidity tokens, functioning as a payout to all liquidity providers proportional to their share of the pool.
The liquidity provider owns the same percentage “share” of the pool, but the amount of tokens in the pool goes up when a fee is charged to a trader for a swap. In other words, that fee is distributed to liquidity providers proportional to their contribution to liquidity reserves. For example, if the amount of liquidity you provide adds up to 2% of the pool, you will receive 2% of all fees from that pool beginning from the time you deposited the liquidity orignally. To calculate the fees earned, you will need to use an external dApp or tool such as APY Vision or Yield Watch.
For liquidity providers, the assets paid out are in the pair of the tokens they provided into the liquidity pool. For example, if you deposited USDC & CLAY into a liquidity pool, you would receive a portion of the trading fees back in USDC & CLAY as well. Fees are collected by liquidity providers by burning liquidity tokens to remove their proportional share of the underlying reserves.
Trading fees cannot be claimed / redeemed; they can only be withdrawn entirely along with the original liquidity added to the pool!
- Pool Parameters – which fee percentage was set for pool
- Volume – higher volume pools generate more fees
- TVL (Total Value Locked) – Fees generated by pool have to be be shared with other liquidity providers
- Volatility – large swings in price can amplify impermanent loss