Complete Guide to Fee Tiers in Liquidity Pools: How They Work, Differences, and How to Choose the Best Tier as an LP

When you start learning about liquidity provision, a common question appears:

Why are there multiple pools with the same pair but different fees?

Examples:

• ETH / USDC (0.05%)
• ETH / USDC (0.3%)
• ETH / USDC (1%)
• ETH / USDC (2%)

What’s the point?
Which pool receives the swaps?
Which tier is better for LPs?
Why would anyone choose a higher-fee pool?

Let’s break it down.

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1. What is a fee tier?

The fee tier is simply the percentage fee charged on each swap executed in a liquidity pool.

Example:

• Pool 0.3% → charges 0.3% per swap
• Pool 2% → charges 2% per swap

These fees are distributed among liquidity providers (LPs).

That’s your income as an LP.

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2. Higher fee = higher profits?

Not always.

A pool can have a very high fee…
but if nobody uses it, no volume → no fees → no earnings.

LP profits depend on two factors:

• The fee percentage
• The volume processed through the pool

You need both.

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3. Why multiple pools for the same pair?

Because protocols want the system to be flexible and efficient.

Each fee tier fits different use cases:

• 0.05% → stable or highly correlated pairs (USDC/DAI)
• 0.3% → moderate volatility (ETH/USDC)
• 1% – 2% → volatile tokens, new tokens, low-liquidity assets

Protocols like Uniswap introduced fee tiers for better market efficiency.

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4. Who decides which pool a swap uses?

The protocol’s router, not the user.

It analyzes:

• Pool liquidity
• Current price
• Fee tier
• Slippage
• Swap impact

Then it picks the most efficient route automatically.

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5. Can one swap be split across multiple pools?

Yes.

If it results in a better price, the router can split the trade.

Example:

Swap of 10 ETH:

• 70% through the 0.3% pool
• 30% through the 1% pool

All done behind the scenes.

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6. How does this affect LPs?

As an LP, you want your pool to:

1. Have enough liquidity
2. Be in a competitive fee tier
3. Be attractive to the router

More volume → more fees → more earnings.

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7. Which fee tier is best for LPs?

It depends.

Low fee tiers (0.05% – 0.3%)

Pros:

• High volume
• Lower volatility
• More consistent earnings

Cons:

• High competition (more TVL)
• Lower earnings per swap

High fee tiers (1% – 2%)

Pros:

• Higher fee per swap
• Often lower TVL → more fees per LP
• Great for volatile or new tokens

Cons:

• Much lower volume
• Risk of capturing very few swaps

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8. Practical example with numbers

Two ETH/USDC pools:

Pool 0.3%

• TVL: $5M
• 24h volume: $2M
• Fees generated: $6,000

Pool 2%

• TVL: $300k
• 24h volume: $200k
• Fees generated: $4,000

Conclusion:
Even with 10× less volume, the 2% pool generates almost the same fees…
but shared between far fewer LPs.

That’s the trade-off.

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9. Can I provide liquidity to multiple tiers?

Yes.

Many LPs split their capital:

• Low-tier pool → stability
• High-tier pool → higher potential APR

Then they compare:

• TVL
• Volume
• Fees generated
• Actual APR

This is the best way to evaluate real performance.

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10. How to know which tier is performing best?

Look at:

• TVL: total value locked
• 24h volume: real usage
• 24h fees: amount earned by LPs
• APR: estimated performance based on volume

A fee tier is good when:

Volume × Fee > Competition (TVL)

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11. Final summary

• Fee tiers define how much each pool charges per swap
• The router decides which pool to use
• LPs should look for volume + efficient fees
• Higher fee doesn’t always mean higher earnings
• Comparing TVL, volume and APR gives you the real picture

Mastering fee tiers is a key skill for becoming a profitable LP in DeFi.