Clear DefinitionsLiquidity Provider Token
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Pronunciation
[liq-wid-i-tee proh-vy-der to-ken]
Analogy
An LP token is like a receipt for depositing money into a shared investment fund—you redeem it to get back your portion of the fund.
Definition
A token issued to users when they supply assets to a liquidity pool, representing their share of the pool’s reserves.
Key Points Intro
LP tokens facilitate DeFi liquidity via:
Key Points
Pool share: Proportional claim on pool assets and fees.
Transferable: Can be traded or used as collateral.
Burn to withdraw: Redeem LP tokens to retrieve underlying assets.
Accounting: Tracks contributions and earnings per provider.
Example
Providing $1 000 worth of ETH–DAI to Uniswap v3 mints LP tokens which accrue trading fees until burned.
Technical Deep Dive
AMM contract mints LP tokens: `liquidity = sqrt(amountA × amountB)`; `LP.mint(to, liquidity)`. On withdrawal, `burn(liquidity)` burns tokens and transfers `liquidity/totalSupply × reserves` of each asset.
Security Warning
Holding LP tokens exposes to impermanent loss; understand price divergence risks.
Caveat
LP tokens represent pooled volatility; position value can fluctuate independently of fee accrual.
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