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LP Returns
LPs earn when traders lose. Returns can be summarised as:
$LP \ returns= Unmatched \ FundingRate \\ + Unmatched \ OpenInterest \ PnL \\+ Liquidation \ Margin \\ +Incentives$
The incentives are aligned in such a way that all the profits from the trades are paid directly to the liquidity providers.

## Unmatched Funding Rate

Say there are $10,000,000 worth of open long positions and$8,000,000 worth of short positions. In this scenario, the funding rate would be positive and longs will pay shorts. For a funding rate = 0.1% :
total payment from long positions = $10,000,000*0.001=$10,000
total payment to short positions = $8,000,000*0.001=$8000
difference earned by the pool = $10,000-$8000=$2000 To understand how funding rate is calculated, please refer to: ## Unmatched OpenInterest PnL For simplicity, let's assume all$10,000,000 long and $8,000,000 short positions were opened at$10,000 price of BTC. Now if the price moves to $10,500: uPNL for longs =$500,000
uPNL for shorts = -$400,000 difference earned by the pool =$100,000