Liquidity Provider (LP)
Also known as: DEX Liquidity Contributor, AMM Token Depositor, DeFi LP
A user who supplies tokens to a liquidity pool in exchange for a share of trading fees and LP tokens.
A liquidity provider (LP) is an individual or entity that contributes tokens to a decentralized exchange’s liquidity pool. In return, they receive LP tokens representing their share of the pool. These tokens entitle them to a portion of the trading fees generated. LPs play a vital role in enabling token swaps and market efficiency in DeFi. However, they assume risks like impermanent loss and token volatility. Some LP tokens can be further staked in yield farms to earn additional rewards, amplifying returns through composable DeFi strategies.