LP token

An LP token is the transferable receipt a liquidity pool issues for a deposit. It records what fraction of the pool's reserves the holder may claim, and burning it is the only way to get those reserves back. The pool is the venue where trades happen. The LP token is the claim on what the venue is holding, and the two are separate objects with separate risks.

Whoever holds the LP token holds the liquidity. It is an ordinary transferable balance, so it can be sold, lent, posted as collateral or drained by a single compromised key, and none of that requires touching the pool contract itself.

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The top two layers are accounting and the bottom two are assets. Selling the LP token moves the claim without moving a single token out of the pool, which is why the receipt and the venue have to be diligenced separately.

The pool is the venue. This is the receipt for it.

The distinction runs in both directions and it is worth stating twice. A liquidity pool is a contract holding reserves that traders swap against, and its mechanics are covered in full under that term. An LP token is what the same contract hands back to whoever supplied those reserves. The pool does the pricing. The LP token does the ownership.

That means every question about an LP token is an ownership question rather than a market question. How much of the pool does this represent, who can move it, what happens to the claim when the composition of the reserves changes underneath it, and what redeems it. None of those are answered by looking at the curve.

The reverse holds too. A pool with deep reserves and a well chosen fee tier tells you nothing about whether the LP tokens for it sit behind a timelock or in a hot wallet. Teams diligence the first and skip the second constantly.

Two ledgers, one contract

A Uniswap v2 style pair keeps both sets of numbers in the same deployment but not in the same place. The reserves are tracked as their own contract state, while the pool shares are handled by inherited token logic with its own supply and balance mapping.³ The two move on different triggers: a swap changes the reserves and leaves share supply alone, a deposit or withdrawal changes both.

That structure is why a provider's claim is proportional, not fixed. You are not owed 500 tokens and $500. You are owed a percentage, and the contents of that percentage change every time somebody trades.

It also explains why fee income never shows up as a separate payment. Fees accumulate into the reserves, so the same share redeems for more than it did. Nothing is distributed. The denominator quietly improves.

How many you get, and why the first deposit is a special case

The first deposit into a v2 pair mints shares equal to the geometric mean of the two amounts supplied, which is the square root of their product. Every later deposit mints shares in proportion to the existing supply, so a provider adding 10% of each reserve to a pool that already exists ends up with slightly under 10% of the total.¹

The first ten to the minus fifteenth of shares is permanently burned to the zero address at that first mint.¹ It exists to stop a griefing attack that would otherwise let someone inflate the value of a single share and price out small deposits. It is a rounding detail with a real security purpose, and it is the kind of thing worth checking for in any fork of that code.

Getting the shares back out means burning them. The provider's underlying liquidity plus whatever fees accrued to it is released at that point and not before.² There is no claim function, no dividend, and no partial harvest of fees separate from the principal.

It is a plain ERC-20, and everything downstream depends on that

A v2 LP token implements the standard token interface: transfer, balanceOf, totalSupply, approvals and the matching events.⁴ Nothing about it is special at the standard level. Any contract that can hold a token can hold this one.

That single fact is what built most of the yield layer above decentralised exchanges. LP tokens get staked into reward contracts, deposited as collateral in lending markets, wrapped by vaults and used as governance weight, all without the pool knowing or caring. Composability is the feature.

It is also the exposure. A receipt that any contract can hold is a receipt that any approved contract can move. Every incentive program that asks providers to deposit LP tokens into a farm is asking them to hand custody of their pool position to a second contract with its own audit history, and that second contract is where a meaningful share of losses in this category have actually happened.

Uniswap v3 broke the fungibility deliberately

Concentrated liquidity gave each provider a position bounded by a chosen price range, so two deposits of identical size into the same pool are no longer identical instruments. Uniswap v3 captures that by representing each position as a non-fungible token rather than a fungible pool share.⁵

The consequence is structural, not cosmetic. Fungible v2 shares can be pooled, split, lent and priced as a commodity. A v3 position cannot, because there is nothing to pool it with. Anything downstream that expected a divisible balance has to be rebuilt around a position identifier, which is why the vault and farming layer over v3 looks so different from the one over v2.

For a launch team the practical read is narrow. If the plan involves LP tokens doing a job somewhere else, in a staking program, as collateral, or inside a partner protocol, the pool version decides whether that job is possible at all. Check it before the incentive design is written, not after.

The treasury question that rarely gets written down

A protocol owned liquidity position is an LP token balance sitting in an address. That balance is usually the single largest unhedged asset a young project holds, and its custody arrangement is usually the least documented thing about it.

Three answers belong in the mechanism design document, not in a deployment script. Which address holds the LP tokens. What governs a withdrawal, meaning multisig threshold, timelock duration, or a published lock period. And what the policy is when the position needs rebalancing, since somebody will eventually have to move it and improvising that under pressure is how liquidity rug allegations start against teams that were not rugging.

The blunt version we give founders: if one key can burn the LP tokens, your liquidity floor is one signature deep, and no amount of depth in the pool changes that.

Common questions

What is the difference between a liquidity pool and an LP token?

The pool is the contract holding the tradable reserves and setting the price from their ratio. The LP token is the receipt that contract issues for a deposit, recording what fraction of those reserves the holder can claim. One is the venue, the other is ownership of a slice of it. Selling the LP token transfers the claim without moving anything out of the pool.

How do LP tokens work?

You deposit both sides of a pair and the pool mints shares proportional to what you added, with the first deposit minting the geometric mean of the two amounts.¹ The shares represent a percentage rather than a fixed quantity, so their contents shift as people trade. Burning them releases your share of current reserves plus the fees that accrued into them.²

Can you sell or transfer an LP token?

Yes, for Uniswap v2 style pools. They implement the standard fungible token interface, so they transfer like any other balance and can be staked, lent or posted as collateral.⁴ Uniswap v3 positions are non-fungible instead, which means they transfer as a single unit and cannot be split or pooled.⁵ Whoever ends up holding either one holds the underlying liquidity.

Do LP tokens earn fees?

Indirectly, and there is no payout event. Trading fees stay inside the pool and grow the reserves backing every share, so the same LP token redeems for more than it did when it was minted.² Your return is the difference between what it redeems for now and what it cost, which is why fee income has to be netted against divergence loss before it means anything.

See Token Launch Strategy for how this applies in practice.

Sources

Uniswap v2 Core
Hayden Adams, Noah Zinsmeister, Dan Robinson (Uniswap / Paradigm), 2020
Geometric-mean share minting on the first deposit, proportional minting thereafter, and the permanent burn of the first 10^-15 of pool shares as a griefing defence.
Pools (Uniswap v2 concepts)
Uniswap Labs developer documentation, 2026
Liquidity tokens minted on deposit in proportion to the share of the pool provided, and burned to retrieve the underlying liquidity plus accrued fees.
Uniswap-v2 Contract Walk-Through
ethereum.org developer tutorials, 2026
Annotated walkthrough of the pair contract showing reserve state and pool-share accounting as separate state within the same deployment.
ERC-20: Token Standard (EIP-20)
Ethereum Improvement Proposals, 2015
The fungible token interface a v2 LP token implements, which is what makes it transferable and composable across unrelated contracts.
Uniswap v3 Core
Hayden Adams, Noah Zinsmeister, Moody Salem, River Keefer, Dan Robinson (Uniswap / Paradigm), 2021
Concentrated liquidity positions captured as non-fungible tokens rather than fungible pool shares.

Last reviewed 2026-08

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