// GLOSSARY -- DEFI

What is LP Token?

1 min read Updated

An LP token is a receipt token issued to liquidity providers when they deposit into a pool — representing their proportional share of the pool's assets and accumulated fees.

WHY IT MATTERS

LP tokens are proof of your pool position. When you deposit ETH and USDC into Uniswap, you receive UNI-V2 LP tokens representing your share. When you want to withdraw, burn the LP tokens to reclaim your proportional share of the pool (plus fees earned).

LP tokens are composable — they can be staked in farms for additional rewards, used as collateral in lending protocols (some support this), or traded. This layered utility is DeFi composability at work.

The value of LP tokens changes as the underlying pool assets change in value and as fees accumulate. Tracking LP token value requires understanding both the assets in the pool and the fees earned.

FREQUENTLY ASKED QUESTIONS

Can I trade LP tokens?
They're transferable ERC-20 tokens, so technically yes. In practice, there's limited secondary market for LP tokens. Their primary use is staking for rewards or redeeming for underlying assets.
How do I calculate LP token value?
LP token value = (Your LP tokens / Total LP tokens) × Total pool value. The pool value includes both deposited assets and accumulated fees.
What happens to LP tokens if the pool gets drained?
LP tokens become worthless if the pool is drained (rug pull or exploit). This is why due diligence on the underlying pool and its contracts is essential.

FURTHER READING

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