What Is a Liquidity Provider in DeFi? LP Tokens Explained

A liquidity provider (LP) is anyone who deposits tokens into a decentralized exchange pool so other people can trade against them, in return for a share of the trading fees. The deposit is tracked by an LP token, a receipt that proves your share of the pool and is redeemed to withdraw.

Liquidity provider definition

On an order-book exchange, professional market makers quote buy and sell prices. On a DEX built around an automated market maker, there is no order book: trades go against a pool of two or more tokens, and anyone can supply that pool. Those suppliers are liquidity providers.

"LP" is used for both the person (the liquidity provider) and the position (LP tokens, or an LP position). In concentrated-liquidity DEXs the position is usually an NFT rather than a fungible token, because each position has its own price range.

How a liquidity provider works

1. You deposit tokens into a pool, usually in a value ratio the pool sets (for a 50/50 pool, equal dollar amounts of each).
2. The pool mints LP tokens to you, proportional to your share of the pool.
3. Every swap pays a fee (for example 0.3%) that stays in the pool, so each LP token is backed by slightly more assets over time.
4. When you withdraw, you burn the LP tokens and receive your share of whatever is in the pool at that moment, which may be a different mix than you deposited.

That last point is the source of impermanent loss: as prices move, traders rebalance the pool against you, so you end up holding more of the token that fell and less of the one that rose.

LP tokens are themselves assets. They can be staked in a farm for extra rewards, or even posted as collateral, which is covered in our guide to borrowing against LP tokens.

Liquidity provider example

Say a hypothetical ETH/USDC pool holds 100 ETH and 300,000 USDC, so ETH trades at 3,000 USDC. You add 1 ETH and 3,000 USDC. The pool now holds 101 ETH and 303,000 USDC, and you own 1/101, about 0.99%, of it.

If the pool does 200,000 USDC of volume a day at a 0.3% fee, it collects 600 USDC in fees. Your 0.99% share is about 5.94 USDC a day. That number shrinks if more LPs join, grows if volume rises, and says nothing yet about impermanent loss if the ETH price moves.

Why a liquidity provider matters

Being an LP is one of the main ways to earn yield in DeFi, but the fee income is a payment for taking on risk:

• Impermanent loss can exceed fees when prices diverge sharply.
• Smart-contract risk: your tokens sit in a contract that could have a bug.
• Token risk: if one side of the pair collapses, traders drain the good asset and leave you with the bad one.
• Reward dilution: incentive emissions are split among all LPs, so the advertised rate falls as more capital arrives.

Stable pairs (two stablecoins, or a liquid staking token and its base asset) carry much less impermanent loss than volatile pairs, which is why many beginners start there.

Liquidity provider on JewelSwap

JewelSwap's yield farms take LP positions on DEXs such as AshSwap, OneDex and xExchange on MultiversX and Cetus and Turbos on Sui, then stake and auto-compound them, so the user holds a farm position rather than managing raw LP tokens. The underlying LP risks above still apply. Our yield farming guide walks through it.

Related terms

• Liquidity pool — the pooled tokens that LPs supply and traders swap against.
• AMM (automated market maker) — the pricing formula that runs a liquidity pool.
• Liquidity mining — extra token rewards paid to LPs on top of trading fees.
• Slippage — the gap between quoted and executed price, which deeper LP liquidity reduces.
• DEX (decentralized exchange) — the exchange where LPs and traders meet.

Learn more on the JewelSwap blog

• Impermanent loss explained — the maths of why LPs can underperform simply holding.
• How to borrow against LP tokens — using your LP position as loan collateral, and the liquidation risk that adds.
• What is yield farming? A beginner's guide — how LP positions plug into farms for extra rewards.

Frequently asked questions

What does LP mean in crypto?

LP stands for liquidity provider: someone who deposits tokens into a DEX pool. It also refers to the LP token or LP position you receive as a receipt for that deposit.

How do liquidity providers make money?

They earn a share of the swap fees the pool charges, in proportion to their share of the pool, and sometimes extra incentive tokens from a farm. Impermanent loss and price moves can offset those earnings.

What is an LP token?

An LP token is a receipt minted when you add liquidity. It represents your share of the pool and is burned to withdraw your portion of the pool's assets and accumulated fees.

JewelSwap Crypto Glossary · educational, not financial advice. Updated 2 October 2026. Browse the full glossary.