Definition ∞ Pool Tokens, also known as liquidity provider tokens, are digital assets issued to users who deposit their cryptocurrencies into a liquidity pool within a decentralized finance protocol. These tokens represent a user’s share of the total liquidity in the pool and entitle them to a portion of the trading fees generated. They can often be further staked or used as collateral in other DeFi applications.
Context ∞ Pool tokens are a fundamental component of decentralized exchange and lending ecosystems, frequently discussed in yield farming strategies and protocol analyses. The risks associated with holding pool tokens, such as impermanent loss or smart contract vulnerabilities, are a constant topic of consideration. Future innovations aim to enhance the utility and security of pool tokens, potentially through more dynamic yield mechanisms and improved risk management frameworks.
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