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LP Token

1 min read
Pronunciation
[el-pee to-ken]
Analogy
LP token is like a membership card for a cooperative—you hold a card that entitles you to a share of profits.
Definition
Abbreviation for Liquidity Provider Token, representing a user’s share in a DeFi liquidity pool.
Key Points Intro
LP token shorthand covers:
Key Points

Pool share receipt: Proof of liquidity contribution.

Yield claims: Entitles holder to accumulated fees.

Redemption mechanism: Burn to reclaim underlying assets.

Composable asset: Usable in vaults and other protocols.

Example
Staking LP tokens in a farm contract yields additional governance tokens on top of trading fees.
Technical Deep Dive
LP tokens conform to ERC‑20 minted by AMM on `addLiquidity()`. `balanceOf(user)` tracks share. `removeLiquidity()` burns LP tokens via `LP.burn()` and transfers assets.
Security Warning
LP tokens inherit smart contract risk from underlying AMM.
Caveat
LP tokens may lack liquidity if pool is small.
Related Terms
Liquidity Provider Token
Yield Farming
Impermanent Loss

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