Provide liquidity to a liquidity pool, earn tokens. Learn more about LP tokens 👇
In these cases, the loan is overcollateralized. If you cannot keep up a certain collateral ratio, the lender will use your LP tokens to claim the underlying assets and liquidate them.One of the most common things to do with your LP tokens is to deposit them in a yield compounder . These services will take your LP tokens, regularly harvest the rewards, and purchase more of the token pair. Then, the compounder will stake these back in the liquidity pool, allowing you to compound your interest.
While the process can be done manually, a yield farm can, in most cases, compound more efficiently than human users. Expensive can be shared across users, and compounding can be done multiple times a day, depending on the strategy.associated with LP tokens. These include:If you lose your LP token, then you lose your share of the liquidity pool and any interest gained.If the liquidity pool you're using is compromised due to a smart contract failure, your LP tokens will no longer be able to return your liquidity to you.
. You also have interest to factor in as well. These uncertainties can make it challenging to make an informed decision about when to exit your liquidity position.By providing your tokens as liquidity, there’s an associated opportunity cost. In some cases, you may be better off investing your tokens elsewhere or use them in a different opportunity.
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