Staked LP Token

The primary incentive is to earn multiple layers of yield. Staking LP tokens typically allows providers to earn:

• Trading fees from the underlying Automated Market Maker (AMM) pool.
• Liquidity mining rewards in the form of a protocol's native token, paid as an incentive for securing liquidity.
• In some cases, protocol revenue sharing from fees generated by the platform.

Many decentralized autonomous organizations (DAOs) use staked LP tokens as a governance mechanism. By staking, users often receive a voting token (e.g., a veToken) proportional to their stake, granting them the right to:

• Vote on protocol parameter changes (e.g., fee structures).
• Direct liquidity mining incentives to specific pools.
• Participate in treasury management decisions.

Staking contracts create a time lock or bonding mechanism for liquidity, which enhances protocol stability. This reduces impermanent loss risk for other LPs by discouraging rapid withdrawal during market volatility. It also secures the protocol's Total Value Locked (TVL), a key metric for user confidence and sustainability. Protocols like Curve Finance popularized this model with its veCRV system.

Staking often grants users premium benefits within the ecosystem. Common perks include:

• Reduced trading fees on associated decentralized exchanges.
• Boosted yields on liquidity mining rewards, where the reward multiplier increases with the size and duration of the stake.
• Access to exclusive pools or higher-tier investment vaults that are not available to unstaked LP token holders.

Staked LP tokens are themselves ERC-20 tokens, making them composable building blocks across DeFi. They can be used as:

• Collateral for borrowing on lending protocols like Aave or Compound.
• Assets deposited into yield aggregators for automated strategy optimization.
• The basis for creating derivative tokens or liquidity positions in more complex financial products, creating a layered yield strategy.

Staking introduces additional risks beyond providing basic liquidity. Key considerations include:

• Smart contract risk: Exposure to bugs in both the AMM and the staking contract.
• Illiquidity periods: Funds may be locked for a fixed duration (e.g., 4 years for veTokens).
• Protocol dependency: Rewards are tied to the health and tokenomics of the issuing protocol.
• Complexity of impermanent loss: The underlying LP position remains exposed to asset price divergence while staked.

The primary risk is the security of the staking contract itself. A bug or exploit in this contract can lead to the permanent loss of all staked LP tokens. This risk is compounded by proxy upgrade patterns and admin key compromises, which can alter contract logic. Always audit the specific staking contract, not just the underlying DEX or token contracts.

Staking LP tokens does not mitigate impermanent loss; it often amplifies the financial impact. While you earn rewards, the value of your underlying assets can diverge significantly from simply holding them. The rewards must outweigh this IL for the position to be profitable. This is a market risk inherent to providing liquidity in volatile pairs.

The value and security of the incentive tokens you earn are separate risks. These tokens may be inflationary, have poor liquidity, or be issued by a protocol that fails (protocol insolvency). A "rug pull" or governance attack on the reward-issuing protocol can render earned tokens worthless, even if your LP position is safe.

Your staked position inherits all risks of the underlying Automated Market Maker (AMM) pool:

• Concentrated Liquidity Risks: In Uniswap V3-style pools, incorrect range setting can lead to zero fees or high IL.
• Oracle Manipulation: Pools used as price oracles can be targeted for flash loan attacks, impacting pool reserves.
• DEX Governance: Changes to pool parameters (like fees) can affect your staked position's yield.

Exiting a large staked position requires unstaking (often with a cooldown/delay) and then removing liquidity from the pool. This two-step process can face:

• High Slippage: Removing a large portion of a pool's liquidity can incur significant price impact.
• Pool Imbalance: If the pool is heavily imbalanced, you may receive a disproportionate amount of the less valuable asset.
• Front-running: Your unstake/withdrawal transactions can be targeted by MEV bots.

Private key management is paramount, as staking often requires multiple transactions. Additional risks include:

• Approval Exploits: Infinite or poorly scoped token approvals to the staking contract can be drained if the contract is compromised.
• Interface Risks: Malicious or buggy front-end websites can trick users into signing harmful transactions.
• Centralization Points: Some staking setups rely on multi-sigs or timelocks controlled by a small team, creating a central point of failure.

A smart contract that holds reserves of two or more tokens, enabling decentralized trading via an Automated Market Maker (AMM). Users deposit token pairs to become Liquidity Providers (LPs) and earn a share of the trading fees.

• Examples: Uniswap V2/V3 pools, Curve pools, Balancer pools.
• Purpose: Provides the foundational liquidity that is tokenized and subsequently staked.

A fungible ERC-20 token minted upon depositing assets into a liquidity pool. It acts as a receipt or proof of ownership for the underlying pooled assets.

• Function: Represents a proportional claim on the pool's total reserves.
• Mechanism: Burning the LP token redeems the underlying assets plus accrued fees. This token is the primary asset that gets staked to create a Staked LP Token.

The practice of locking or staking crypto assets (like LP Tokens) in a smart contract to earn additional token rewards, typically a protocol's governance token.

• Incentive: Protocols use this to bootstrap liquidity and decentralize governance.
• Process: Staking an LP Token is the most common action to participate in yield farming, transforming it into a Staked LP Token that accrues extra yield.

A dedicated smart contract that accepts deposits of specific assets (e.g., LP Tokens) and distributes reward tokens according to a predefined emission schedule.

• Role: It's the engine that issues Staked LP Tokens (often as a receipt token) and manages reward calculations.
• Key Functions: Handles user deposits/withdrawals, tracks stake time, and calculates rewards based on share of the total staked supply.

A token minted to represent a staked position. A Staked LP Token is a type of receipt token.

• Utility: It is transferable, allowing users to trade or use their staked position as collateral in other DeFi protocols while still earning rewards.
• Examples: Curve's gauge tokens, SushiSwap's xSUSHI (for staked SUSHI), and staked versions of Uniswap V2 LP tokens.

A risk faced by liquidity providers where the value of their deposited assets changes compared to simply holding them, due to price volatility in the pool. Staking LP Tokens does not mitigate this underlying risk.

• Cause: Occurs when the price ratio of the pooled tokens diverges from the ratio at deposit.
• Consideration: The additional rewards from staking (yield farming) are often intended to offset the potential for impermanent loss.