# Maximizing LP Token Incentives

The liquidity providers (LPs) in a pool can generally receive basic token incentives  in two parts:

* Trading fee from users who wish to perform swaps; and/or
* Additional reward from the third-party interest-earning protocols (such as Compound/AAVE).

However, the drawback of supporting the rewards from the third-party interest-earning protocol is that significant gas is incurred by moving the tokens to/from the protocols. To address such concerns, Curve.fi offers the pools for liquidity providers (LPs) with and without participation in third-party interest-earning protocols at the cost of lower liquidity.

![](https://3401028798-files.gitbook.io/~/files/v0/b/gitbook-legacy-files/o/assets%2F-MTCxhJf3Zbf7-LfmpEj%2F-MTF9P_38N9AIXuGKSve%2F-MTFDpTSNG4gpN2jw_cV%2Fimage.png?alt=media\&token=fc705690-6a3e-4e2f-93fd-7a6fb0066671)

## Dynamic Cash Reserve Algorithm

Smoothy addresses the concerns by using a dynamic cash reserve (DCR) algorithm.  The basic idea is that Smoothy will reserve about 10% of the token as cash in the pool and deposit the rest 90% into the third-party interest-earning protocols. If a swap results in

* The cash reserve is greater than 20%; or
* There is insufficient cash reserve to complete the swap

Smoothy will perform a rebalance so that

* If the cash reserve is greater than 20% of the token, 10% will be retained as cash, and the rest of the cash reserve is deposited into the underlying protocol to earn interest; or
* If the cash reserve is insufficient to complete the swap, extra tokens are withdrawn from the underlying protocol so that 10% of the token becomes reserved cash after the swap.

As a result, if as long as the swap does not trigger a rebalance event, the gas cost of the swap can be extremely low by moving reserved cash owned by Smoothy and bypassing gas costly withdrawal/deposit operations of underlying protocols.

![](https://3401028798-files.gitbook.io/~/files/v0/b/gitbook-legacy-files/o/assets%2F-MTCxhJf3Zbf7-LfmpEj%2F-MTF9P_38N9AIXuGKSve%2F-MTFC9smKWGRBNWxXlfA%2Fimage.png?alt=media\&token=2313354d-e0d4-4866-a0b7-88ff19ec7112)

By putting 90% (expected) of the tokens into the third-party interest-earning protocol, the LPs of Smoothy can maximize their token incentives by

* Trading fee (including swap fee/penalty fee); and
* Interest earned from the third-party protocols; and
* Penalty fee incurred by slippage.

![](https://3401028798-files.gitbook.io/~/files/v0/b/gitbook-legacy-files/o/assets%2F-MTCxhJf3Zbf7-LfmpEj%2F-MTF9P_38N9AIXuGKSve%2F-MTFFHKltIm0rbe6y0D0%2Fimage.png?alt=media\&token=c84557a2-9e1a-48c1-bcd5-a0d9ba133334)