What are LP tokens?
Updated
Liquidity pool tokens, also known as LP tokens, are issued to users who provide liquidity to liquidity pools on Decentralized Exchanges (DEXs) that run on an Automated Market Maker (AMM) protocol.
Popular DEXs such as Uniswap and PancakeSwap distribute LP tokens to their liquidity providers. AMMs allow for digital assets to be traded automatically using smart contracts within liquidity pools, rather than relying on intermediaries in traditional markets.
LP tokens serve multiple purposes, such as earning interest, providing collateral for crypto loans, or transferring ownership of the staked liquidity. By holding LP tokens, liquidity providers can earn a share of the trading fees generated within the pool, which is proportional to their contribution of liquidity.
In summary, LP tokens represent a valuable asset for liquidity providers who contribute to liquidity pools on DEXs, as they enable access to various benefits and functions that help to maximize the value of their liquidity.
