Crypto Terms:
Letter L
Jun 19, 2023 |
updated Apr 07, 2024
What are Liquidity Provider Tokens (LP Tokens)?
Liquidity Provider Tokens (LP Tokens) Meaning:
Liquidity Provider Tokens (LP Tokens) -
tokens issued to liquidity providers on a DEX that represent the liquidity provider's share of a pool in question.
Let's find out Liquidity Provider Tokens (LP Tokens) meaning, definition in crypto, what are Liquidity Provider Tokens (LP Tokens), and all other detailed facts.
Liquidity Provider Tokens (LP Tokens) track each contribution given to the overall liquidity pool since the amount of owned LP tokens corresponds to the liquidity share in the overall pool. They’re given to liquidity providers on decentralized exchanges (DEXs).
DEXs that issue LP tokens to liquidity providers include Uniswap, PancakeSwap, and Sushi.
In the most basic terms, LP tokens are very similar to tokens on the same network. For instance, Uniswap and Sushi operate on the Ethereum network. Therefore, LP tokens issued by these DEXs are considered to be ERC-20 tokens. Consequently, they can be transferred, traded, and staked on other protocols just like a regular ERC-20 token.
LP token holders have control over their locked liquidity, therefore, they can redeem LP tokens from the liquidity pools whenever they wish to do so. However, if they redeem them too early, they might face small penalties.
As mentioned above, LP tokens and the share in the overall liquidity pool are proportionate. This fact is utilized to find out:
- The transaction fees’ share accumulated throughout a liquidity provision per one liquidity provider;
- The percentage of liquidity when liquidity providers redeem their LP tokens.
You can calculate the value of an LP token using this formula:
Total Value of Liquidity Pool/Circulating Supply of LP Tokens = Value of 1 LP Token
In regards to DeFi platforms, more and more ways to use LP tokens are popping up.
For example, LP tokens are also used for farming which is a way to maximize rewards by staking LP tokens. Additionally, LP tokens can be used to qualify its holder to participate in an initial DEX offering (IDO). This is due to the fact that you must hold a certain amount of LP tokens that have a specific value in order to be eligible.
exchange/strong>/a> offers a <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-pair/">trading pair<\/strong><\/a> for that asset. Considering traditional markets, listing signifies that shares of a company can be traded on that specific stock exchange.<\/p>\n<p>Overall, this implies that <strong>the listed company has met specific financial and regulatory requirements.<\/strong> Additionally, this means that the company is compliant with the exchange's degree of trust. Therefore, the listing process indicates that the company's shares meet the minimum quality requirements.<\/p>\n<p>When an asset is listed with <a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//buy-ethereum-eth/">Ethereum (ETH)<\/strong><\/a> or any other main exchange pairing asset (e.g., <a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//buy-bitcoin-btc/">BTC/strong>/a>), a project and its asset get the same level of trust as its trading pair. Besides, when an asset is listed, it's a sign that the connected trading pair has enough<strong> <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-liquidity/">liquidity/a>. <\/strong>Therefore, the pair is able to <strong>generate an proper price discovery.<\/strong><\/p>","definition":"a process that occurs when an exchange offers a trading pair for a specific asset.","status":"published","updated_at":"2024-04-02T14:16:57.000000Z"}"
:prev-section="{"id":472,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Market_maker","level":"easy","section":"L","keyword_en":"Liquidity Provider","author_id":1,"created_at":"2023-06-19T06:59:00.000000Z","slug":"what-is-liquidity-provider","title":"What is Liquidity Provider?","keyword":"Liquidity Provider","content":"<p>Liquidity providers are decentralized exchange users who <strong>fund a <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-liquidity-pool/">liquidity pool<\/a> with tokens they possess<\/strong>. They do this to facilitate trading on the platform to earn passive income on their deposits.<\/p>\n<p>A liquidity provider, for example, may supply a liquidity pool containing $8,000 worth of Ether and $8,000 worth of USD-pegged decentralized <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-stablecoin/">stablecoin/a> DAI to facilitate the trading that takes place between the two. As a result, each time a trade on the ETH\/DAI is made, <strong>the liquidity provider gets compensated for funding the pool in question<\/strong>.<\/p>\n<p>So, the percentage of the liquidity pool they provide determines<strong> how much they will get paid<\/strong>. Typically, they are <strong>obligated to fund two separate assets when funding the pool<\/strong>, to allow traders to change between one another by trading them in pairs.<\/p>\n<p><a href=https://www.bitdegree.org/"//crypto//best-decentralized-exchange/">Decentralized <\/strong>exchanges<\/a> employ automated market maker-based systems to facilitate the trading of illiquid trading pairs with minimal downtime leveraging liquidity pools. Rather than typical order book-based trading platforms, such exchanges employ money for each asset in each trading pair to permit deals to be performed.<\/p>\n<p>Although trading illiquid trading pairs on order book-based exchanges may result in significant dislocation and failure to finish transactions, liquidity providers' benefit is that trades may always be performed as long as the liquidity pools are large enough. As a result, <strong>liquidity providers are regarded as trade enhancers<\/strong> and are compensated through service fees charged from their facilitated trades.<\/p>","definition":"a user who funds liquidity pools with their personal assets.","status":"published","updated_at":"2024-04-02T14:16:55.000000Z"}"
:model="{"id":925,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Cryptocurrency","level":"medium","section":"L","keyword_en":"Liquidity Provider Tokens (LP Tokens)","author_id":1,"created_at":"2023-06-19T06:59:01.000000Z","slug":"what-are-liquidity-provider-tokens-lp-tokens","title":"What are Liquidity Provider Tokens (LP Tokens)?","keyword":"Liquidity Provider Tokens (LP Tokens)","content":"<p><strong>Liquidity Provider Tokens (LP Tokens) track each contribution given to the overall<\/strong> <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-liquidity-pool/">liquidity pool<\/strong><\/a> since the amount of owned LP tokens corresponds to the liquidity share in the overall pool. They’re given to liquidity providers on <a href=https://www.bitdegree.org/"//crypto//best-decentralized-exchange/">decentralized exchanges (DEXs)<\/strong><\/a>.<\/p>\n<p>DEXs that issue LP tokens to liquidity providers include <strong>Uniswap, PancakeSwap, and Sushi<\/strong>. <\/p>\n<p>In the most basic terms, <strong>LP tokens are very similar to tokens on the same network<\/strong>. For instance, Uniswap and Sushi operate on the Ethereum network. Therefore, LP tokens issued by these DEXs are considered to be <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-erc-20/">ERC-20/strong>/a> tokens. Consequently, they can be transferred, traded, and staked on other protocols just like a regular ERC-20 token.<\/p>\n<p><strong>LP token holders have control over their locked liquidity<\/strong>, therefore, they can redeem LP tokens from the liquidity pools whenever they wish to do so. However, if they redeem them too early, they might face small penalties.<\/p>\n<p>As mentioned above, LP tokens and the share in the overall liquidity pool are proportionate. This fact is utilized to find out:<\/p>\n<ul>\n<li>The <strong>transaction fees’ share<\/strong> accumulated throughout a liquidity provision per one liquidity provider;<\/li>\n<li>The <strong>percentage of liquidity<\/strong> when liquidity providers redeem their LP tokens.<\/li>\n<\/ul>\n<p>You can calculate the value of an LP token using this formula:<\/p>\n<p><em>Total Value of Liquidity Pool\/Circulating Supply of LP Tokens = Value of 1 LP Token<\/em><\/p>\n<p>In regards to DeFi platforms, more and more ways to use LP tokens are popping up.<\/p>\n<p>For example, <strong>LP tokens are also used for <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-yield-farming/">farming/a>/strong> which is a way to maximize rewards by staking LP tokens. Additionally, LP tokens can be used to <strong>qualify its holder to participate in an <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-initial-dex-offering-ido/">initial DEX offering (IDO)<\/a><\/strong>. This is due to the fact that you must hold a certain amount of LP tokens that have a specific value in order to be eligible.<\/p>","definition":"tokens issued to liquidity providers on a DEX that represent the liquidity provider's share of a pool in question.","status":"published","updated_at":"2024-04-07T21:24:55.000000Z","author":{"id":1,"user_id":1,"image_id":2641,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2024-02-29T07:19:25.000000Z","title":"Editor-In-Chief","slug":"aaron-s-editor-in-chief","description":"<p>Having completed a Master’s degree in Economics, Politics, and Cultures of the East Asia region, Aaron has written scientific papers analyzing the differences between Western and Collective forms of capitalism in the post-World War II era.<\/p>\n<p>With close to a decade of experience in the FinTech industry, Aaron understands all of the biggest issues and struggles that crypto enthusiasts face. He’s a passionate analyst who is concerned with data-driven and fact-based content, as well as that which speaks to both Web3 natives and industry newcomers.<\/p>\n<p>Aaron is the go-to person for everything and anything related to digital currencies. With a huge passion for blockchain & Web3 education, Aaron strives to transform the space as we know it, and make it more approachable to complete beginners.<\/p>\n<p>Aaron has been quoted by multiple established outlets, and is a published author himself. Even during his free time, he enjoys researching the market trends, and looking for the next supernova.<\/p>","user":{"id":1,"first_name":"Aaron","last_name":"S.","email":"aaron@bitdegree.org","email_sanitized":"aaron@bitdegree.org","email_verified_at":"2023-12-01T09:40:20.000000Z","must_verify_email":false,"is_registered_with_wallet":false,"status":"active","country":"LT","last_connected_ip":"88.119.132.125","referral_token":"05TMu2NysXOCn525","referred_by":null,"last_connected_at":"2024-04-09T08:14:54.000000Z","created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2024-04-09T08:14:54.000000Z","full_name":"Aaron S."}}}"
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current-chapter="L"
current-section="what-are-liquidity-provider-tokens-lp-tokens">