DON'T LOOK AT APR ALONE: HOW TO EVALUATE A LIQUIDITY POOL.
When people look at a liquidity pool, one number usually catches their attention first:
APR.
But APR alone doesn't tell you whether a pool is suitable for you.
There are at least three useful numbers to understand:
1. TVL
TVL means Total Value Locked.
It tells you approximately how much value is currently held in the pool.
In general, deeper liquidity can help reduce the impact of larger swaps.
2. Swap volume
Volume tells you how much trading activity is happening through the pool.
This matters because liquidity providers earn a share of swap fees when users trade through the pool.
A pool with high TVL but almost no trading activity may generate very different fee economics from a pool with consistent volume.
3. APR
APR is an estimate based on recent activity.
It can change.
So a high APR today isn't a guarantee that you'll earn the same rate tomorrow.
This is why looking at the three numbers together gives more context:
TVL → How much liquidity is there?
Volume → How much is being traded?
APR → What is the estimated return based on recent activity?
There's another part that shouldn't be ignored: impermanent loss.
LP returns aren't simply “APR minus nothing.”
The assets themselves can move in price, and that can affect the value of your position.
So before providing liquidity, don't just ask:
«“What's the APR?”»
Ask:
“Where is the liquidity coming from, how much trading activity is there, and what risks am I taking to earn these fees?”
That's a much more useful way to look at an LP position.
When people look at a liquidity pool, one number usually catches their attention first:
APR.
But APR alone doesn't tell you whether a pool is suitable for you.
There are at least three useful numbers to understand:
1. TVL
TVL means Total Value Locked.
It tells you approximately how much value is currently held in the pool.
In general, deeper liquidity can help reduce the impact of larger swaps.
2. Swap volume
Volume tells you how much trading activity is happening through the pool.
This matters because liquidity providers earn a share of swap fees when users trade through the pool.
A pool with high TVL but almost no trading activity may generate very different fee economics from a pool with consistent volume.
3. APR
APR is an estimate based on recent activity.
It can change.
So a high APR today isn't a guarantee that you'll earn the same rate tomorrow.
This is why looking at the three numbers together gives more context:
TVL → How much liquidity is there?
Volume → How much is being traded?
APR → What is the estimated return based on recent activity?
There's another part that shouldn't be ignored: impermanent loss.
LP returns aren't simply “APR minus nothing.”
The assets themselves can move in price, and that can affect the value of your position.
So before providing liquidity, don't just ask:
«“What's the APR?”»
Ask:
“Where is the liquidity coming from, how much trading activity is there, and what risks am I taking to earn these fees?”
That's a much more useful way to look at an LP position.