LP Token
A receipt token issued to liquidity providers representing their share of a pool; redeemable for underlying assets plus accrued fees.
LP Token — An LP token (liquidity provider token) is a receipt token issued by a decentralized exchange when a user deposits assets into a liquidity pool. LP tokens represent the holder proportional share of the pool and can be redeemed to withdraw the underlying tokens plus any accumulated trading fees.
What Is an LP Token?
An LP token is a tokenized proof of deposit issued by a DEX smart contract when a liquidity provider adds funds to a liquidity pool. For example, depositing ETH and USDC into a Uniswap V2 pool generates UNI-V2 LP tokens. These tokens track the depositor share of the pool total reserves and accumulated fees.
LP tokens are themselves ERC-20 tokens (on Ethereum) or SPL tokens (on Solana), meaning they can be transferred, traded, or used in other DeFi protocols as collateral.
How LP Tokens Work
When you deposit $10,000 into a pool with $100,000 total liquidity, you receive LP tokens representing 10% of the pool. As the pool collects swap fees, the value of your LP tokens increases because the pool total reserves grow. When you redeem (burn) your LP tokens, you receive your proportional share of the current reserves.
On Uniswap V3 and other concentrated liquidity AMMs, LP positions are represented as NFTs rather than fungible tokens, because each position has a unique price range.
Why LP Tokens Matter
LP tokens enable DeFi composability, the ability to use one protocol output as input for another. LP tokens can be staked in yield farming contracts for additional rewards, used as collateral in lending protocols, or deposited into auto-compounding vaults. This layering of DeFi primitives is what makes the ecosystem so capital-efficient.
LP tokens also serve as transparent proof of liquidity contribution, allowing anyone to verify pool ownership on-chain.
Related Terms
Liquidity Provider (LP)
An individual or entity that deposits token pairs into a liquidity pool in exchange for trading fee rewards.
Read definition DeFi & AMMLiquidity Pool
A smart contract holding two or more tokens that traders swap against, funded by liquidity providers who earn fees.
Read definition DeFi & AMMYield Farming
The practice of moving crypto assets between DeFi protocols to maximize returns through trading fees, token rewards, and incentives.
Read definition DeFi & AMMSwap Fee
The fee charged on each trade in a liquidity pool, distributed proportionally to all liquidity providers in that pool.
Read definitionFrequently Asked Questions
Common questions about LP Token in cryptocurrency and DeFi.
Uniswap V2-style LP tokens are fungible ERC-20 tokens that can be transferred or traded. Uniswap V3 LP positions are NFTs and can be sold on NFT marketplaces, though this is less common. Always verify the LP token contract before trading.
LP tokens are the only way to withdraw your deposited liquidity. If you lose access to them (for example by sending them to the wrong address), your liquidity remains locked in the pool permanently. Always keep LP tokens in a secure wallet.
LP tokens appreciate as the pool collects trading fees, because each token represents a share of a growing pool. However, impermanent loss can reduce LP token value if the underlying token prices diverge significantly from the deposit ratio.
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