> For the complete documentation index, see [llms.txt](https://fx100.gitbook.io/fx100-docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://fx100.gitbook.io/fx100-docs/providing-liquidity/lp-economics.md).

# LP economics and risk

Where LP yield comes from, and what you are underwriting to earn it.

## Revenue sources

| Source                      | Description                                                                                                                                                                |
| --------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| **Position fees**           | Charged on every open and close. The most consistent source, scaling with volume rather than direction.                                                                    |
| **Funding**                 | The net of funding flows accrues to the vault. When the market is balanced, longs pay a floor fee to the pool. See [funding](/fx100-docs/how-the-system-works/funding.md). |
| **Liquidation fees**        | Charged on positions liquidated after the protection window.                                                                                                               |
| **Trader losses**           | The vault is the counterparty. When traders lose, the vault collects.                                                                                                      |
| **Residual system revenue** | Remaining protocol revenue after other allocations.                                                                                                                        |

The majority of system fees flow to liquidity providers. A portion funds an insurance reserve, and a further reserve is used to top up LP returns during low-volume periods, smoothing yield across cycles.

All allocations are governance-adjustable.

## The risks

**You are the counterparty.** When traders profit, you pay. A sustained period in which traders are collectively right is a period in which LP capital declines, regardless of fee income.

**Directional exposure through skew.** When open interest is heavily one-sided, the vault carries the opposite exposure. The [dynamic spread](/fx100-docs/trading/pricing-and-execution.md) and funding both push against imbalance, but they reduce it rather than eliminate it.

**The withdrawal cooldown keeps your capital fully invested.** Once you request a withdrawal, your funds continue to earn all yields — fees, funding, and trader-PnL impact — for the full seven days until you claim. You stay exposed to the upside and the downside throughout. See [the Liquidity vault](/fx100-docs/providing-liquidity/the-usdc-vault.md).

**Smart contract risk.** As with any on-chain protocol. See [contracts and audits](/fx100-docs/reference/contracts-and-audits.md).

**Correlated market risk.** One vault backs every market. A violent move that goes the same direction across BTC, ETH, and the long tail simultaneously is not diversified away by the vault structure — per-market caps bound the size of the exposure, not its correlation.

## Solvency backstops

Two mechanisms protect the vault at the tail:

* **The insurance reserve**, funded from system fees.
* [**ADL**](/fx100-docs/how-the-system-works/adl.md), which closes the highest-profit positions when pending profits approach a safety threshold.

Neither is a guarantee against loss.