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LP Tokens

When you add liquidity to a V2 pool, you receive LP tokens — fungible ERC-20 tokens that represent your proportional share of the pool.

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Minting

LP tokens are minted when you deposit both tokens into a pool. First deposit (new pool): LP minted=amount0×amount1−MINIMUM_LIQUIDITY\text{LP minted} = \sqrt{amount_0 \times amount_1} - \text{MINIMUM\_LIQUIDITY} A small amount (MINIMUM_LIQUIDITY = 1000 wei) is permanently locked to prevent division-by-zero attacks. Subsequent deposits: LP minted=min⁡(amount0×totalSupplyreserve0,  amount1×totalSupplyreserve1)\text{LP minted} = \min\left(\frac{amount_0 \times \text{totalSupply}}{reserve_0},\; \frac{amount_1 \times \text{totalSupply}}{reserve_1}\right) You must deposit tokens at the current reserve ratio. Any excess of one token is refunded.

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Burning

To withdraw liquidity, you burn your LP tokens and receive both tokens back: amount0=LP burnedtotalSupply×reserve0amount_0 = \frac{\text{LP burned}}{\text{totalSupply}} \times reserve_0 amount1=LP burnedtotalSupply×reserve1amount_1 = \frac{\text{LP burned}}{\text{totalSupply}} \times reserve_1 Because fees accumulate in reserves, the amount you receive will be greater than what you deposited (assuming trading volume occurred).

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Properties

PropertyDescription
StandardERC-20
TransferableYes — can be sent, traded, or used in other protocols
SupplyIncreases with deposits, decreases with withdrawals
ValueBacked by the pool’s token reserves

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Impermanent Loss

LP tokens are subject to impermanent loss — when the relative price of the two tokens changes from the time of deposit, the LP’s position is worth less than simply holding both tokens. The loss is “impermanent” because it reverses if the price returns to the original ratio. The magnitude of impermanent loss depends on the price change:
Price ChangeImpermanent Loss
1.25x0.6%
1.50x2.0%
2x5.7%
3x13.4%
5x25.5%
Trading fees earned by the position may offset impermanent loss, depending on volume.