LP

An LP supplies crypto assets to a liquidity pool so that a decentralized exchange or lending protocol has enough funds on hand to let other users trade or borrow without waiting for a matching counterparty. In practice this usually means depositing two tokens in roughly equal value, such as ETH and a stablecoin, into an automated market maker like Uniswap or Curve.

In return for locking up funds, the protocol mints an LP token representing the depositor's share of the pool. Every swap that trades against the pool pays a small fee, which is distributed among LPs in proportion to their contribution, and many protocols let LPs stake that same LP token elsewhere to earn additional rewards through yield farming. Burning the LP token later returns the underlying assets plus any accrued fees.

Being an LP is not risk-free. The biggest hazard is impermanent loss: if the two deposited tokens drift apart in price, the pool automatically rebalances the LP's holdings toward the weaker asset, so withdrawing at that point can leave less value than simply holding both tokens outright. Volatile or uncorrelated pairs carry the highest impermanent loss risk, while stablecoin pairs are comparatively safe. Smart contract bugs, protocol exploits, and sudden liquidity withdrawals by other large providers add further risk. Newer designs, such as concentrated liquidity ranges on Uniswap v3 and v4, let LPs target specific price bands for higher fee income, at the cost of needing more active management.