LP-Swap
Academy

What is a LP token

How is it possible that people are able to swap a token A for a token B in a completely decentralised way, i.e. without relying on exchanges like Binance? This is thanks to liquidity providers who provide their tokens A and tokens B into a liquidity pool of tokens A-B. As a proof of their liquidity provision, they receive A-B LP tokens.

Anyone can then swap a token A for a token B by using a liquidity pool of tokens A-B. Usually there will be a trading fee for this swap, which will be used to reward the liquidity providers. Each liquidity provider is rewarded proportionally to its share of the liquidity pool.

Liquidity providers may redeem their tokens A and tokens B from the pool at any time by giving back their A-B LP tokens, but they will not necessarily get back the initial quantities of tokens A and B that they provided.

If you want to become a liquidity provider of the liquidity pool, then you have to provide tokens A and tokens B in equal proportion into the pool. You can do this for instance on PancakeSwap. As a proof of your deposit, you get A-B LP tokens in return.

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