An LP token records a claim associated with assets supplied to a liquidity pool. In a conventional fungible pool design, adding liquidity mints LP tokens and removing liquidity burns them in exchange for the holder’s portion of the pool’s assets. The receipt is different from a protocol’s governance token, even if both are issued within the same ecosystem.
A changing claim
The underlying asset quantities change as traders swap, fees accumulate, and providers add or remove liquidity. An LP token therefore does not promise the exact quantities originally deposited. Its value depends on the current assets supporting the claim and the relevant pool rules.
Not all liquidity positions use interchangeable tokens. Concentrated liquidity positions can have different price ranges and may be represented by NFTs or other position records. Their withdrawal and fee-collection mechanics differ.
Using the receipt elsewhere
LP tokens may be transferred or deposited into another application for incentives or collateral, if supported. This adds dependencies on the receiving application without removing the original pool’s risks. A holder can still face asset-price losses, underperformance versus holding, and contract failures. Losing control of an LP token can also mean losing control of the associated withdrawal claim.