LP Staking
Definition
An incentive provided by projects to lock LP tokens in a smart contract in exchange for additional rewards on top of the exchange fees distributed to liquidity providers. LP staking represents a commitment to maintaining your contribution to a liquidity pool.
All you need to know
You join a liquidity pool for a token pair and receive LP tokens as your receipt. This earns you a share of fees from the liquidity pool. If a project also has LP staking, you can stake your LP tokens on their website for additional rewards.
Liquidity is essential for any asset to achieve price stability and cryptocurrencies are no exception. A token achieves sufficient liquidity on popular decentralized exchanges, such as Raydium and Uniswap, by having large liquidity pools for their token swaps. The exchange itself incentives users to contribute to liquidity pools by distributing fees fairly among liquidity providers. However, a project or exchange can further incentivize users to participate in liquidity pools by offering rewards for staking their LP tokens. Becoming an LP staker for your favorite project can be quite simple:
First, you must contribute liquidity to the appropriate liquidity pool. For example, to join the DeFi Land liquidity pool, you will need to contribute to the DFL-USDC liquidity pool on Raydium. You must contribute equal values of each token to the liquidity pool. You receive LP tokens in return, which are your “receipt” for being a liquidity provider.
Then you can go to the project’s staking user interface, and stake your LP tokens to gain additional rewards.
Staking your LP tokens can be thought of as a second layer of commitment to maintain your liquidity in the liquidity pool. LP staking rewards are often funded by fixed emissions from the project. Just like single-sided staking, is common for projects to pay for rewards using fixed emissions (unlocking token supply to distribute among users) or income from the project.
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