LP Token (Liquidity Provider Token)
A token automatically issued to liquidity providers as a receipt for their deposit in a liquidity pool. LP tokens represent proportional ownership of the pool's assets and accumulated fees. They can be redeemed at any time to withdraw the underlying tokens, and many DeFi protocols allow staking LP tokens for additional rewards.
“When you deposit ETH and USDC into a Uniswap pool, you receive UNI-V2 LP tokens. These can be staked in a yield farm for bonus rewards, or burned to withdraw your share of the pool plus earned fees.”
Liquidity Pool
A collection of funds locked in a smart contract that enables decentralized trading on AMM-based exchanges. Liquidity providers (LPs) deposit paired tokens in equal value ratios and earn a share of the trading fees generated by swaps in that pool. Pools replace traditional order books in DEX architecture.
Yield Farming
The practice of strategically deploying crypto assets across DeFi protocols to maximize returns through a combination of trading fees, token rewards, lending interest, and liquidity incentives. Yield farmers actively move capital between protocols to chase the highest yields, often compounding returns by reinvesting rewards. Higher yields typically come with higher risks, including impermanent loss, smart contract exploits, and token devaluation.
Staking
The process of locking up cryptocurrency as collateral to support blockchain network operations — specifically validating transactions and producing blocks — in exchange for rewards. Staking is the core economic mechanism of Proof of Stake blockchains. Stakers earn yield from block rewards and transaction fees but risk slashing (losing a portion of their stake) for misbehavior or extended downtime.