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description: What are Liquidity Provider (LP) Tokens
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# Understanding LP Token

&#x20;:white\_check\_mark: LPs are an essential component of decentralized exchanges (DEXs).&#x20;

:white\_check\_mark: LP tokens are issued to liquidity providers on a DEX, tracking individual contributions to the liquidity pool

:white\_check\_mark: They represent a proportional share of the pool, ensuring fair distribution of transaction fees and liquidity returns 🌊

**The value of a LP token is determined by this formula:**

* Total Value of Liquidity Pool / Circulating Supply of LP Tokens = Value of 1 LP Token
* Technically, LP tokens aren't much different from other tokens on the same network

For instance, these tokens can be transferred, traded, and staked like other tokens.

Holding LP tokens gives liquidity providers control over their locked liquidity

**LP tokens are used for:**

* Determining a provider's share of transaction fees during liquidity provision
* Calculating liquidity returned to providers when they redeem their LP tokens
* Staking LP tokens allows you to earn rewards on top of swap fees (a.k.a. "farming")

:white\_check\_mark: UniverseSwap’s functionality is built by Liquidity Providers

:white\_check\_mark: Providing and maintaining LP tokens is foundational to creating efficient markets in DeFi
