What are LP Tokens

What are LP Tokens

Liquidity is a crucial factor in DeFi. It is a fundamental concept which means to easily convert an asset without causing sharp changes in the asset's price. If you add a token to a crypto liquidity pool, the platform (in this case, the Curve platform) generates a receipt that shows you have a share in the pool. This receipt is your liquidity provider (LP) token. This LP token is the magic behind DeFi and allows owners to use it for a lot of functions, whether in its own platform or other DeFi apps.
The liquidity available in the DeFi ecosystem is effectively multiplied. Before the invention of liquidity tokens, assets on the Ethereum ecosystem were locked when in use or staked. Like in Ethereum 2.0's Proof-of-Stake (PoS) mechanism, your ETH is locked up for it to be validated and for new blocks to be added to Ethereum's blockchain. In these cases, there is less liquidity in the system.
In DeFi, the creation of readily convertible derivative assets such as LP tokens has solved the problem of locked crypto liquidity. It's like an indirect form of staking where you prove you own the tokens, with the LPs acting as receipt, which you can then use instead of staking the tokens themselves.