> ## Documentation Index
> Fetch the complete documentation index at: https://docs.theblockchainlibrary.com/llms.txt
> Use this file to discover all available pages before exploring further.

# LP Token

> A token or accounting unit representing a user's proportional ownership of assets deposited into a liquidity pool.

# LP Token

A token or accounting unit representing a user's proportional ownership of assets deposited into a liquidity pool.

## Definition

A token or accounting unit representing a user's proportional ownership of assets deposited into a liquidity pool.

## Why it matters

DeFi concepts explain blockchain-based markets, lending, trading, liquidity, and financial automation.

## How it works

When a user deposits crypto, the smart contract calculates the proportion of the pool owned by the user. It then mints unique LP tokens representing that percentage stake. When a withdrawal is requested, the contract burns the tokens and transfers the pro-rata value back to the user's wallet.

## Real-world example

On SushiSwap, providers receive SLP (Sushi Liquidity Provider) tokens after depositing assets into a trading pool.

## Advantages

* Provides proof of ownership for deposits
* Enables easy tracking of earned trading fees
* Can be used in other DeFi protocols

## Limitations

* Value fluctuates with pool assets
* Requires technical knowledge to track
* Risk of loss if the token is transferred incorrectly

## Common misconceptions

* Some think LP tokens are standard currency to be traded on exchanges. They are specific to the protocol that issued them.
* Many users forget that LP tokens represent a fluctuating share, not a fixed amount of coins.

## Related knowledge

* [Smart Contract](/generated/v2/glossary/smart-contract) — term

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**Canonical knowledge ID:** `glossary:lp-token`