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Author: Admin | 2025-04-28
Than the underlying tokens to the recipient — particularly if the recipient planned to contribute to the same pool after receiving the funds.Used for yield farming (or liquidity mining): Yield farming is without a doubt the most popular use of LP tokens. This entails staking LP tokens in one or more yield farms to earn an additional source of yield in a secondary token. SushiSwap, for example, allows users to stake their SushiSwap LP tokens to earn additional rewards in the form of SUSHI.Take a loan against them: A growing number of decentralized lending protocols are beginning to allow users to use their LP tokens as collateral for a loan. This allows users to continue earning rewards on their LP tokens, while being able to extract capital from their holdings without needing to sell their underlying LP tokens. Abracadabra.money and 1Pool Finance are two such platforms that offer this functionality. That said, users need to consider the opportunity cost of doing this since they will no longer be able to use these LP tokens for yield farming.Burn them: In some cases, project owners who have provided liquidity for their tokens can opt to ‘burn’ their associated LP tokens. This entails manually sending their LP tokens to a known ‘burn address’, rendering them irrecoverable. Doing this ensures that the token will always have at least some liquidity, and is typically used as a defense against ‘rug pulls’.When performed correctly and using a risk-averse strategy, liquidity provision can provide a relatively lucrative and reliable revenue stream for participants.But it’s not without its fair share of risks. Chief among these is the risk of hacks. As DeFi protocols grow in uptake and their TVLs swell, they are increasingly targeted by hackers who will attempt to exploit the protocol to make off with user funds.Unfortunately, this is relatively commonplace in 2022, and barely a month goes by without at least one DeFi protocol losing tens of millions of dollars in a hack. Though there are now a variety of decentralized insurance options available in most cases, these are elective, and few liquidity providers take
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