LP Token

Definition ∞ An LP token is a digital receipt given to users who provide assets to a decentralized exchange’s liquidity pool. An LP token, or Liquidity Provider token, is a digital asset issued to users who deposit cryptocurrency pairs into a liquidity pool on a decentralized exchange (DEX) or other automated market maker (AMM) protocol. These tokens represent the holder’s proportional share of the pooled assets and the accrued trading fees. LP tokens can often be staked in other DeFi applications to earn additional yield, contributing to the composability of the decentralized finance ecosystem.
Context ∞ LP tokens are central to the functioning of decentralized finance, frequently appearing in news related to yield farming, impermanent loss, and DEX liquidity. The security and utility of these tokens are critical for the health of DeFi protocols, as they incentivize users to provide necessary liquidity for trading. Discussions often involve strategies for maximizing returns from LP tokens and mitigating associated risks within various DeFi platforms.