# Who is on the other side of your trade, and what they are paid

> Canonical: https://blazephoenix.xyz/learn/who-is-on-the-other-side
> License: CC BY 4.0 (attribution + link) · © 2026 BlazePhoenix
> Updated: 2026-08-13

One 100-token swap traced from the provider side: the 0.3% pool fee is never collected anywhere — it is what makes the pool's product grow from 1,000,000 to 1,000,272.79, so the same 100 shares now cover a bigger pool; that growth is how providers are paid. The trader paid 0.5019 in fees total, of which providers received 0.2480, and the 28 bps protocol fee is a constant with no function anywhere that can raise it.

When you swap, no person agrees to take the other side. A contract does, following a fixed rule. But the tokens that contract hands you are not the contract's: they were deposited by people, and those people are paid for it. This article follows one trade from their side.

It matters for two reasons. If you ever consider providing liquidity yourself, this is the arithmetic you would be signing up for. And if you only ever trade, it explains why the fee exists at all, which is the difference between accepting a charge and understanding a price.

## What a provider actually deposits

A provider puts in both tokens, in the ratio the pool already holds, and receives shares recording their fraction of it. If the pool holds 1,000 A and 1,000 B and there are 100 shares outstanding, one share entitles its holder to 1% of whatever is in the pool at the moment they withdraw.

Note the phrase "whatever is in the pool". The share is not a claim on 10 A and 10 B. It is a claim on 1% of two amounts that will have changed by the time you come back, because every trade changes them. That single distinction contains everything else in this article.

## One trade, from the pool's side

Take our standard pool: 1,000 A and 1,000 B, charging 0.3%. Someone trades 100 A in and, as computed in the earlier articles, receives 90.6611 B. Afterwards the pool holds:

```
A side:  1000 + 100      = 1100.0000
B side:  1000 - 90.6611  =  909.3389
```

The rule the pool follows is that the two amounts multiplied together must not shrink. Before the trade that product was 1,000 x 1,000 = 1,000,000. After it:

```
1100 x 909.3389 = 1,000,272.79     (+272.79, or +0.0273%)
```

The product grew. Now run exactly the same trade with the fee switched off, where the trader would have received 90.9091 instead:

```
1100 x 909.0909 = 1,000,000.00     (+0.00)
```

With no fee, the product lands precisely back where it started. So the fee is not a charge collected and taken away somewhere; it is the entire mechanism by which the pool ends the trade larger than it began. No new shares were issued, and the same 100 shares now cover a bigger pool. That is how a provider is paid: not by a transfer, but by the thing they own a fraction of becoming bigger.

## Two fees, two recipients

The trade above involved two separate fees and they go to different places, which is worth being exact about because they are usually blurred together.

The pool fee of 0.3% cost the trader 90.9091 - 90.6611 = 0.2480 B and stayed in the pool, in favour of its providers. The protocol fee of 28 basis points cost 90.6611 x 0.0028 = 0.2539 B and was taken from the output by the router. The trader paid 0.5019 in fees in total; the providers received 0.2480 of it.

The 28 bps figure is written into the contract as a constant with no function anywhere that changes it. It is not a rate that starts low and rises once there is enough volume to be worth taxing — there is no mechanism to raise it, so that is a claim you can check rather than trust.

## The other side of the provider's ledger

The fee is the income. Now the cost, which is the part that is left out of most explanations, and which is not optional.

Look again at what the provider holds after the trade. Their 1% share was 10 A and 10 B before. It is now 11 A and 9.09339 B. They did not choose this. The pool sold B to the trader because the trader wanted B, so every provider is now holding more of the token that was being sold to the pool, and less of the token being bought out of it.

Value it. The pool's new ratio prices one B at 1,100 / 909.3389 = 1.20967 A. So the provider's share is worth 11 + (9.09339 x 1.20967) = 11 + 11.0000 = 22.0000 A.

Now value what they would have held if they had never deposited anything and simply kept their 10 A and 10 B: 10 + (10 x 1.20967) = 22.0967 A.

```
as a provider:  22.0000 A
simply holding: 22.0967 A
                -------
behind by        0.0967 A   (0.44%)
```

On this single trade, the provider is 0.44% worse off than someone who did nothing, and that is after collecting the fee. The name for the gap is impermanent loss, and it is a bad name: there is nothing temporary about it if you withdraw at this price. It is called impermanent because if the ratio returns to where it started, the gap closes to zero on its own.

So the provider's bet, stated plainly, is that the fees collected across many trades will exceed the drift that accumulates while the price wanders. It is a real position with a real risk, and it is not a savings account.

## Where the analogy would mislead you

People describe providing liquidity as "renting out your tokens", and the picture is close enough to be dangerous. When you rent something out you get it back — the same object, plus rent. Here you do not get the same thing back. You get whichever mix of the two tokens the pool happens to hold when you leave, plus the fees that accumulated inside it.

That is why an advertised yield on liquidity provision is only ever half a statement. It measures fee income over some window and says nothing about the composition drift over the same window, which can be larger, and which is invisible in the yield figure.

## What this means for you as a trader

Three practical consequences follow from the provider's side of the ledger.

First, depth is somebody's money at risk. A pool is deep because people put capital there and are bearing that drift. This is why depth is scarce, why it concentrates in a few pairs, and why a token with a genuinely deep pool has told you something a market cap cannot.

Second, fees are not extractive by nature. Remove the fee entirely and the pool stops growing, providers stop depositing, and the depth that was making your trades cheap disappears — and depth, as the sizing article showed, dominates fees in what a large trade actually costs.

Third, the numbers on both sides come from the same two balances. Your price impact and the provider's composition drift are the same event described from two directions: you moved the ratio, and they are holding the result.

**Verify it yourself:** Read a pool's two reserves from a block explorer, multiply them, and write the product down. Come back after some trades and multiply again. The product should have grown, and it should not have grown by more than the fee rate could account for.

Related: https://blazephoenix.xyz/learn/what-is-a-liquidity-pool · https://blazephoenix.xyz/learn/what-is-impermanent-loss · https://blazephoenix.xyz/learn/three-prices · https://blazephoenix.xyz/learn/sizing-your-trade · https://blazephoenix.xyz/learn/what-is-an-amm