What Are Liquidity Provider (LP) Tokens – And How Do They Work?

You might have heard the buzzwords ‘’yield farming‘’ or “staking for yield.’’ Indeed, they’re popular terms used in the decentralized finance (DeFi) ecosystem, which birthed the concept of decentralized exchanges (DEXs).

To operate, DEXs such as Uniswap use automated market makers (AMMs). These protocols rely on liquidity providers to contribute their assets into a pool to facilitate transactions. Once you become a liquidity provider, you’re issued liquidity provider (LP) tokens.

What are LP tokens? What role do they play in DeFi? Are they risky?

Read on to find out.

What Are LP Tokens?