Proportional Distribution excels at rewarding concentrated, high-utility capital. LPs earn fees directly proportional to their share of the liquidity within a specific price range, as pioneered by Uniswap V3. This model incentivizes active management and capital efficiency, allowing protocols to achieve deep liquidity with less total value locked (TVL). For example, a concentrated position can earn up to 4000x more fees than a passive, full-range position for the same capital, fundamentally altering the LP ROI calculus.
LABS
Comparisons
Proportional vs Equal Fee Distribution Among LPs
A technical analysis comparing two core DEX fee distribution models: proportional (based on active liquidity share) and equal (flat distribution per LP). We examine capital efficiency, fairness, and protocol design implications for builders and liquidity providers.
Chainscore © 2026
introduction
THE ANALYSIS
Introduction: The Core DEX Fee Distribution Dilemma
Decentralized exchanges face a fundamental design choice in how to reward liquidity providers, a decision that directly impacts capital efficiency, LP behavior, and protocol sustainability.
Equal Distribution takes a different approach by sharing fees equally among all LPs in a pool, regardless of individual contribution size or position. This is the model used by Uniswap V2 and most classic AMMs. This strategy results in a trade-off: it promotes simplicity, passive participation, and predictable returns for small LPs, but can lead to significant capital inefficiency as large amounts of liquidity sit unused at price extremes where trading volume is minimal.
The key trade-off: If your priority is maximizing capital efficiency and attracting sophisticated, active LPs for major assets, choose a Proportional model. If you prioritize simplicity, broad-based passive participation, and predictable yields for long-tail or new assets, an Equal distribution model is often more effective. The choice dictates your protocol's liquidity profile and target provider base.
tldr-summary
PROPORTIONAL VS EQUAL FEE DISTRIBUTION
TL;DR: Key Differentiators at a Glance
A quick scan of the core trade-offs between the two dominant liquidity pool fee distribution models.
01
Proportional Distribution: Capital Efficiency
Rewards are tied to stake size: Fees are split based on an LP's share of the pool's total liquidity. This matters for large, passive capital providers (e.g., whales, DAO treasuries) seeking a direct, predictable return on their capital commitment.
02
Proportional Distribution: Simpler Incentives
Aligns with traditional staking logic: The model is straightforward and easy to model for yield. This matters for institutional LPs and quantitative funds building automated strategies, as it reduces incentive calculation complexity.
03
Equal Distribution: Small LP Protection
Democratizes fee access: Each liquidity position (e.g., each NFT in Uniswap V3) earns an equal share, regardless of size. This matters for retail participants and active managers providing concentrated liquidity, preventing dominance by large, passive capital.
04
Equal Distribution: Active Management Incentive
Rewards strategy over capital: An LP with a perfectly positioned $1k can earn the same fees as a poorly positioned $1M. This matters for sophisticated market makers (e.g., Gamma Strategies) who optimize ranges, as it prioritizes capital efficiency over raw size.
HEAD-TO-HEAD COMPARISON
Feature Comparison: Proportional vs Equal Fee Distribution Among LPs
Direct comparison of fee distribution mechanisms for liquidity providers in Automated Market Makers (AMMs).
| Metric / Feature | Proportional Distribution | Equal Distribution |
|---|---|---|
Primary Incentive Model | Capital efficiency | Capital diversification |
Reward for Large LPs | Higher absolute fees | Same fee share per unit of liquidity |
Reward for Small LPs | Lower absolute fees | Same fee share per unit of liquidity |
Concentration Risk | High (tends to centralize liquidity) | Low (encourages spread) |
Best For | Whales, maximizing yield on large positions | Retail LPs, bootstrapping new pools |
Protocol Examples | Uniswap V3, Curve | Uniswap V2, PancakeSwap V2 |
Impermanent Loss Impact | Amplified in concentrated positions | Standard, based on pool share |
pros-cons-a
A CRITICAL LP DESIGN CHOICE
Pros and Cons: Proportional vs Equal Fee Distribution
The fee distribution model directly impacts capital efficiency, LP incentives, and protocol TVL. Here's a data-driven breakdown of the trade-offs.
01
Proportional Distribution: Pro
Capital Efficiency: Fees are paid in proportion to an LP's share of the pool's liquidity. This rewards large, concentrated positions, aligning with the capital efficiency goals of protocols like Uniswap V3 and Curve. This matters for professional LPs and protocols seeking maximum yield from deployed capital.
~80%
TVL in Prop. Models
02
Proportional Distribution: Con
Barrier to Small LPs: Small liquidity providers earn negligible fees, discouraging retail participation. This can lead to centralized liquidity controlled by whales or DAO treasuries, potentially reducing pool resilience and decentralization. This matters for community-focused DEXs aiming for broad participation.
< 0.01%
Fee Share for Small LPs
03
Equal Distribution: Pro
Fair Launch & Bootstrapping: Every LP earns the same fee share regardless of deposit size. This is crucial for fair launch models and new protocols like early Balancer pools, encouraging widespread initial liquidity distribution. This matters for projects prioritizing community building and anti-whale mechanics.
10k+
LPs in Early Stages
04
Equal Distribution: Con
Capital Inefficiency & Sybil Risk: Large LPs are disincentivized, capping total TVL. It encourages Sybil attacks—splitting one large deposit into many small wallets to capture more fees—increasing blockchain load and creating management overhead. This matters for protocols scaling beyond initial bootstrapping.
High
Sybil Risk
pros-cons-b
PROPORTIONAL VS. EQUAL SHARING
Pros and Cons: Equal Fee Distribution
Key architectural trade-offs for liquidity provider (LP) incentives at a glance.
01
Proportional Distribution (e.g., Uniswap V3)
Rewards capital efficiency: Fees are paid based on an LP's share of the active liquidity range. This matters for professional market makers who can concentrate capital to capture more volume, leading to higher potential APY on deployed capital.
02
Proportional Distribution (e.g., Uniswap V3)
Introduces complexity and risk: LPs must actively manage price ranges. Poor positioning results in "inactive" liquidity and zero fees. This matters for passive LPs or new users, creating a steep learning curve and potential for impermanent loss miscalculation.
03
Equal Distribution (e.g., Uniswap V2, Balancer 80/20)
Simplifies participation: All LPs in the pool share fees equally per unit of liquidity, regardless of price range. This matters for passive investors and long-term holders seeking straightforward yield without active management overhead.
04
Equal Distribution (e.g., Uniswap V2, Balancer 80/20)
Reduces capital efficiency: Capital is spread across the entire price curve (0 to ∞), much of which is rarely traded. This matters for high-volume pools, as it can lead to lower overall returns per dollar deposited compared to concentrated models.
CHOOSE YOUR PRIORITY
Decision Framework: When to Choose Which Model
Proportional Distribution for Capital Efficiency
Verdict: The Clear Winner. Strengths: Maximizes yield for active capital. LPs are rewarded precisely for the liquidity they provide to active price ranges. This model, used by Uniswap V3 and its forks, is essential for sophisticated strategies like concentrated liquidity. It allows LPs to achieve higher APYs by targeting high-volume price ranges, making efficient use of their capital.
Equal Distribution for Capital Efficiency
Verdict: Inefficient for Targeted Strategies. Strengths: Simpler to manage. However, this model, common in traditional AMMs like Uniswap V2, dilutes rewards across the entire curve. Capital is locked in rarely-touched price ranges, leading to lower overall yield per dollar deposited. It's suitable for passive, set-and-forget positions but fails to optimize for volume.
verdict
THE ANALYSIS
Verdict and Final Recommendation
A data-driven breakdown of when to use proportional versus equal fee distribution models for liquidity providers.
Proportional Distribution excels at aligning incentives with capital efficiency and risk. LPs earn fees directly proportional to their share of the pool's liquidity, creating a direct correlation between capital commitment and reward. This model is the industry standard on major DEXs like Uniswap V3 and Curve, where it drives deep liquidity for high-volume assets. For example, in a pool with $10M TVL, an LP providing $1M (10% share) will consistently earn 10% of the trading fees, making it predictable for sophisticated market makers and large institutions.
Equal Distribution takes a different approach by distributing fees equally among all active LPs, regardless of their stake size. This strategy, used by protocols like Balancer for its LiquidityBootstrappingPools, results in a trade-off: it strongly incentivizes participation from smaller LPs, enhancing decentralization and bootstrapping new assets, but at the cost of capital efficiency. A whale providing 90% of a pool's TVL earns the same fee share as a retail LP providing 0.1%, which can lead to inefficiency and potential capital flight from large providers.
The key trade-off is between capital efficiency and broad participation. If your protocol's priority is maximizing TVL depth for established, high-volume trading pairs (e.g., ETH/USDC), choose Proportional Distribution. It rewards scale and is the proven model for core liquidity hubs. If your priority is fair launch mechanics, community bootstrapping, or encouraging small-LP participation for a novel asset, choose Equal Distribution. It sacrifices some efficiency for a more democratized and potentially more resilient initial liquidity base.
ENQUIRY
Get In Touch
today.
Our experts will offer a free quote and a 30min call to discuss your project.
NDA Protected
Confidentiality24h Response
Time to ValueDirectly to Engineering Team
No Sales Fluff10+
Protocols Shipped
$20M+
TVL Overall