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How do liquidity provider (LP) tokens function and what is their purpose?

How do liquidity provider (LP) tokens function and what is their purpose?

LP tokens have multiple use cases beyond representing one’s assets, including being used as collateral in loans, yield farming, and LP staking. These tokens gain value as a fundamental component of DeFi, contributing to the smooth operation of DEXs and AMMs. Passive income for liquidity providers comes from transaction-generated fees earned by the liquidity pool in proportion to their investment share.

– LP tokens have various use cases beyond representing one’s assets.

– These tokens gain value as a fundamental component of DeFi.

– Passive income for liquidity providers comes from transaction-generated fees earned by the liquidity pool in proportion to their investment share.

Key points:

– LP tokens can be used as collateral in loans, but this is still an emerging trend and only a few platforms offer the service.

– Yield farming involves depositing LP tokens in a yield farm or compounder to earn rewards, and users can use different compound strategies according to the effort and time they want to dedicate to this type of investment.

– LP staking allows liquidity providers to stake their LP tokens in exchange for rewards of new tokens, and early stakers in a project can earn a very high APY.

– LP tokens function the same way as other tokens supported by a blockchain network, such as ERC-20 tokens.

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