What is an LP token
LP token (Liquidity Provider token) is a type of token that users receive when they add assets to a liquidity pool.
Key facts
- issued to liquidity providers
- commonly used in DeFi
- represent a share of a liquidity pool
Explained simply
An LP token confirms that a user has added liquidity to a pool.
How LP tokens work
When a user adds assets to a liquidity pool:
- the assets are locked in the pool
- the user receives LP tokens
- LP token holders earn a share of trading fees
Example
A user deposits ETH and USDC into a liquidity pool on a DEX and receives LP tokens that represent their share of the pool.
These tokens allow the user to earn part of the trading fees generated by the pool.
Where LP tokens are used
How LP tokens differ from other tokens
- Utility tokens provide access to services on blockchain platforms.
- Governance tokens allow participation in protocol governance.
- Security tokens represent investment rights.
- RWA tokens represent real-world assets.
- Meme tokens are driven by internet culture.
How LP tokens relate to the blockchain ecosystem
LP tokens are closely connected with:
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Related concepts
FAQ
What does an LP token represent?
It represents a user's share in a liquidity pool.
Can LP tokens be sold or transferred?
In some protocols LP tokens can be used in other DeFi applications or traded.
How do LP token holders earn rewards?
They receive a portion of the trading fees generated by the liquidity pool.