What is LP in decentralized finance?

Asked 2 years ago

Hi there! I'm still getting used to DeFi jargon and would like to know what LP is?

Anderson Ezie

Tuesday, February 01, 2022

LP can refer to liquidity pools or liquidity providers and liquidity providers are the makers of the market. Some websites use LP providers to refer to liquidity providers but are less common to see LP than the actual word liquidity pool with reference to pools of assets. LPs make the market by providing their funds to enable trading on a decentralized exchange. The funds provided are stored in liquidity pools which can be created by anyone or by the developers of the smart contract.

Depending on the context in DeFi you might hear or see LP as a reference to liquidity pools or liquidity providers. In return, the platform distributes fees to the LPs which becomes the interest they earn for providing their funds as liquidity. LPs risk impermanent loss, but they also earn LP tokens and fees which go a long way to cover the losses. In a centralized exchange, the money is added by the platform from their funds or borrowed funds. Just know that whenever you swap those ETH for USDT or any token for another you are taking from a part of someone else's money known as the LP provider.

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