Fungible LP Tokens

Definition ∞ Fungible LP Tokens are standardized digital receipts issued to liquidity providers in decentralized finance protocols, representing their share of a liquidity pool. These tokens are interchangeable with other LP tokens from the same pool, allowing for easy transfer or use in other DeFi applications. They serve as a claim on the underlying assets within the pool and any accrued fees. This fungibility enables further composability within the DeFi ecosystem.
Context ∞ News frequently covers the utility and risks associated with Fungible LP Tokens in decentralized exchanges and yield farming strategies. These tokens are central to how users interact with and profit from providing liquidity in DeFi. A key discussion involves the potential for impermanent loss and the security risks of depositing LP tokens into other protocols. Future developments are expected to introduce more standardized ways to assess and manage the risks associated with holding and using these liquidity representations.