Many LP participants operate under a common misconception—they assume returns come from token appreciation. The reality? That's not the game at all.

LP returns are actually powered by three distinct mechanisms:

**Trading volume** drives the core: Every swap that flows through the pool generates fees. More transactions equals more revenue for liquidity providers.

**Liquidation events** create opportunities: When positions get liquidated, it often creates trading cascades and price volatility, which can generate significant fee spikes.

**Capital efficiency** matters deeply: How much of your deployed capital actually works, and how intensively is it utilized? This determines your effective yield.

Here's the key insight—this is a fundamentally different risk profile than most DeFi participants realize. You're not speculating on whether a token moons. You're betting on market flow, volatility, and utilization rates. Understanding this distinction separates informed LPs from those who get caught off guard.