Liquidity Provider Token (LP Token)
A token issued to liquidity providers representing their proportional share of a DeFi liquidity pool.
What is LP Token?
A liquidity provider token (LP token) is a receipt token issued by a decentralized exchange or DeFi protocol to users who deposit assets into a liquidity pool. LP tokens represent the holder's proportional ownership of the underlying pool — including both the deposited tokens and any accrued trading fees. When a liquidity provider wants to withdraw their assets, they return the LP tokens to the smart contract, which burns them and releases the corresponding share of the pool's current assets. LP tokens are themselves standard ERC-20 tokens on Ethereum and can be used in other DeFi protocols — for example, staked in yield farming contracts to earn additional governance token rewards (a practice called 'liquidity mining'). The value of LP tokens fluctuates with the pool's composition, and the quantity held can differ from the original deposit due to impermanent loss and fee accumulation.
Example
A user deposits $5,000 in ETH and $5,000 in USDC into a Uniswap pool. They receive 100 UNI-V2 LP tokens representing a 1% share of the pool. Three months later, they return the LP tokens and receive their share of the pool — now worth $10,600 due to $600 in accumulated trading fees, offset slightly by impermanent loss from ETH's price movement.
Source: Uniswap Protocol Documentation