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What are LP tokens?
- Liquidity pool tokens (also known as liquidity provider tokens) are given to users who provide liquidity in liquidity pools. These tokens act as a receipt, allowing you to claim your original stake and interest earned.
- You can also use your LP tokens to compound interest in a yield farm, take out crypto loans, or transfer ownership of the staked liquidity. However, it is important to understand that you don't actually own the associated liquidity once you give up custody of your LP tokens.
For automated market makers (AMMs) like SumSwap to function, liquidity providers must contribute assets to liquidity pools. When tokens are deposited into a crypto liquidity pool, the platform automatically generates a new token that represents the share the depositor owns of that pool. This token acts as a 'receipt' for your underlying share of the pool based on the amount of assets you provided. This is called a liquidity provider (LP) token, and it can be used for a multitude of functions both within its native platform and other decentralized finance (DeFi) apps. These LP tokens allow you to retrieve your original deposit plus any interest gained. You'll find your LP tokens in the wallet you used when providing liquidity. You may need to add the LP token’s smart contract address to see it in your crypto wallet.
LP tokens allow AMMs to be non-custodial, meaning they do not hold on to your tokens, but instead operate via automated functions that promote decentralization and fairness. Liquidity provider tokens also unlock new layers of token trade and access across the entire DeFi ecosystem, which has facilitated growth in the form of significant network effects. This has the effect of multiplying the liquidity available in the DeFi ecosystem.
The non-custodial feature of AMM platforms is key to being part of the decentralized finance ecosystem. On AMM platforms, you remain in control of your assets by receiving LP tokens in return for providing tokens like ether (ETH) to the crypto liquidity pool, which is managed by code and not by human operation. LP tokens represent a crypto liquidity provider’s share of a pool, and the crypto liquidity provider remains entirely in control of the token. Holding these LP tokens allows you total control over when you withdraw your share of the pool without interference from anyone. And since LP tokens are ERC-20 tokens, they can be transferred, exchanged, and even staked on other protocols.
In exchange for depositing assets into a Sumero pool, liquidity providers receive the corresponding pool LP tokens. A Sumero pool LP token is an ERC20 contract specific to each Sumero pool. Hence, LP tokens are transferrable. Holders of Sumero LP tokens may stake the token into a pool’s staking pool in order to receive Clay token rewards.