Fee/IL Coverage: A Mental Model for LP Profitability
Stop reading APR in isolation. The single ratio that tells you whether your position is actually compounding — and how to compute it in a spreadsheet you'll actually update.
Most LP dashboards lie by omission. They show you fees earned and APR, but rarely show you the impermanent loss those fees are paid to absorb. A position can show a beautiful 25% fee APR and still be net negative on the day you withdraw.
The single ratio worth tracking: Fee / IL Coverage.
Definition
For an open position with price-induced loss ΔIL (negative if losing) and accumulated fees F:
const coverage =
ΔIL >= 0
? Infinity // no IL — fees are pure profit
: (F / Math.abs(ΔIL)) * 100 // % of IL covered by fees so farThree regimes worth naming:
coverage ≥ 100%→ position is profit-generating in real terms. Hold or harvest.50% ≤ coverage < 100%→ position is paying for itself but not yet compounding. Hold unless IL is still widening faster than fees.coverage < 50%→ position is losing money on a mark-to-market basis. The fee headline is misleading; review range and pair.
Where APR hides the truth
A common scenario:
| Day | Price moved | Fees ($) | IL ($) | APR (annualized) | Coverage |
|---|---|---|---|---|---|
| 1 | flat | 0.42 | 0.00 | 18% | ∞ |
| 7 | +3% | 2.95 | -1.10 | 22% | 268% |
| 14 | +8% | 5.80 | -4.30 | 21% | 135% |
| 21 | +14% | 8.42 | -11.20 | 20% | 75% |
| 30 | +18% | 11.30 | -18.90 | 19% | 60% |
APR barely moves; coverage cratered. The position is still earning fees, but it's losing them — and more — to IL faster than you're collecting. The chart that matters is the third column minus the fourth, not either alone.
Operationally
- Compute coverage weekly. Don't trust dashboards that quote APR without IL — they're optimized for retention, not your P&L.
- Set a rule: rebalance triggers when coverage falls below 50% AND price has trended directionally for 5+ days. Fast moves often mean-revert; trends don't.
- For directional moves you've already missed: harvesting fees out and re-entering at the new range often beats holding through.
Fee APR is the marketing number. Coverage is the operating number. Track both, decide on the second.
This is the metric the Play Wallet's dashboard uses as its IL Coverage column — green when it's covering, amber when partial, red when underwater. It's the first place I look when reviewing a position, before APR.