How do LP tokens, fees, and virtual price work for Dynamic Pools?

Simple Example

Let's say Anne creates a pool and deposits $50 worth of liquidity in the pool.

So, pool has $50

Anne has 50 LP tokens out of 50.

Virtual price = 1

Bob sees the pool and also adds $50 worth of liquidity in the pool

Pool has $100

Anne has 50 of 100 LP tokens

Bob has 50 of 100 LP tokens

Virtual price = 1

There are a 100 LP tokens total, and both Anne and Bob own 50% of the pool and if each withdrew from the pool, they would get 50% of the pool and $50 worth of their liquidity back.

Also the virtual price of the LP token is 1. All assets in the pool came from deposits and no fees were returned.

Now let's say over time the pool has earned $50 in trading fees

Pool now has $150 in liquidity

The virtual price is now 1.5 meaning the pool value grew 50% outside of deposits.

Anne still has 50 of 100 LP tokens

Bob still has 50 of 100 LP tokens.

If Anne were to exchange her 50 LP tokens to withdraw her assets, she would get $75 worth of assets, Then Bob would have 50 LP tokens out of 50 and would be entitled the rest.

But, instead, let's say Carl wants to add $50 worth of liquidity.

Well the virtual price of the LP token is now 1.5, so he would get ~33 LP tokens. So after his deposit... Pool has $200 in liquidity

Anne has 50 of 133 => 50/133200 = $75

Bob has 50 of 133

Carl has 33 of 133 => 33/133200 = $50

How are the fees compounding in a Dynamic Pool?

Simply the more liquidity the more the pool can support larger low slippage trades and so can attract more volume and thus more fees. A good example is our dynamic stable USDC-USDT pool. The more liquidity there, the more volume and thus more fees.