What are LP tokens?

When a user contributes funds to a liquidity pool, they receive LP tokens in return. These tokens represent the user’s share of the liquidity pool. LP tokens are usually issued in proportion to the amount of liquidity provided by the user. For example, if a user contributes 10% of the total liquidity in a pool, they will receive 10% of the LP tokens issued by that pool.

LP tokens grant holders ownership rights over the portion of the liquidity pool represented by the tokens. Additionally, holders of LP tokens are entitled to a share of the trading fees generated by the liquidity pool. These rewards are distributed to LP token holders periodically, typically in the form of additional tokens or cryptocurrency.

Generally, LP rewards, when realized, are paid out in the two tokens attached to the pool along with any value deposited.