What is an LP token?
When you deposit tokens into a liquidity pool on a DEX, you receive LP tokens in return. These tokens represent your share of the pool — they're like a receipt. When you want to withdraw, you return your LP tokens and receive your proportional share of the pool (original tokens + accumulated fees).
How LP tokens work
If you deposit $1,000 into a pool with $10,000 total, you receive LP tokens representing 10% of the pool. If the pool grows to $11,000 (from trading fees), your LP tokens are now worth $1,100 when redeemed.
LP tokens and yield
LP tokens automatically accumulate yield — you don't need to claim fees separately. The value of your LP tokens increases as the pool earns trading fees. When you redeem (burn) your LP tokens, you receive the original tokens plus all accumulated fees.
LP tokens and security
LP tokens are important for DeFi security analysis:
- Locked LP tokens — if a protocol's LP tokens are locked in a time-lock contract, the team cannot remove liquidity
- Burned LP tokens — if LP tokens are sent to the zero address, liquidity is permanently locked
Checking where LP tokens are held is a key step in evaluating DeFi protocol safety.