Liquidity Provider Tokens

Definition ∞ Liquidity Provider Tokens are digital receipts given to users who supply funds to decentralized exchange pools. These tokens, often called LP tokens, are issued to individuals who deposit their digital assets into a liquidity pool on a decentralized exchange (DEX) or other decentralized finance (DeFi) protocol. They represent a user’s proportional share of the pooled assets and accrue fees generated from trading activities within that pool. LP tokens can often be further utilized within other DeFi applications, enabling additional yield generation.
Context ∞ Liquidity Provider Tokens are central to the functioning of automated market makers (AMMs) and the broader decentralized finance ecosystem. Discussions frequently concern the risks associated with providing liquidity, such as impermanent loss, and the security of the underlying smart contracts. Future developments aim to enhance the utility of LP tokens, potentially through more sophisticated yield strategies and improved risk management tools.