Liquidity Provider Token (Carbon LP Token)

A Liquidity Provider Token (LP Token), such as a Carbon LP Token, is a blockchain-based receipt token minted and issued to users who deposit assets into a decentralized exchange (DEX) liquidity pool, representing their proportional share of the pooled assets and their entitlement to a portion of the trading fees generated. On the Carbon blockchain, these tokens are non-fungible tokens (NFTs), uniquely identifying each liquidity position with metadata like the deposited pair (e.g., SWTH/ATOM), fee tier, and position bounds. This contrasts with many other DEXs that use fungible ERC-20-style LP tokens, making Carbon's model more granular and customizable for concentrated liquidity strategies.

The primary function of an LP Token is to facilitate proof of ownership and enable the redemption of the underlying assets. When a user, or liquidity provider (LP), wishes to withdraw their capital and accrued fees, they must burn their specific Carbon LP Token. This action triggers the smart contract to calculate their share of the current pool reserves and send the corresponding amounts of both tokens back to their wallet. The token's value is therefore directly derived from the value of the assets in its share of the pool plus any unclaimed fees, making it a debt instrument or claim against the pool's treasury.

Carbon LP Tokens are integral to the platform's Automated Market Maker (AMM) model, particularly its implementation of concentrated liquidity. By representing positions as NFTs, Carbon allows for complex parameters like custom price ranges, where liquidity is only active between a set minimum and maximum price. This metadata is stored within the LP Token itself, enabling sophisticated strategies where providers can target specific volatility ranges to optimize fee earnings and capital efficiency compared to traditional full-range liquidity provision.

These tokens also enable composability within the broader DeFi ecosystem. While not fungible, a Carbon LP Token representing a position can potentially be used as collateral in lending protocols, listed on NFT marketplaces, or integrated into yield aggregators that automatically manage the position's price ranges. This transforms the LP Token from a simple receipt into a programmable financial primitive, embedding the logic and state of a financial strategy directly into a transferable asset on the blockchain.

A Carbon LP Token is a non-fungible token (NFT) that represents a user's unique position and claim on liquidity within the Carbon DeFi protocol. Unlike standard Automated Market Maker (AMM) LP tokens, which are fungible and represent a uniform share of a pool, Carbon LP tokens are minted as NFTs to encapsulate a user's specific, customizable trading strategy. This token acts as the definitive record and access key for the liquidity provider's position, storing all critical parameters such as the chosen trading pair, price ranges, fee tiers, and the deposited token amounts.

The token's primary function is to facilitate asymmetric, one-sided liquidity provisioning. A user deposits a single asset (e.g., USDC) and defines a strategy—comprising a buy range at lower prices and a sell range at higher prices. The Carbon smart contract mints an NFT representing this discrete strategy. When market prices move into the defined ranges, the protocol automatically executes the limit orders, swapping the deposited asset for the other token in the pair. The NFT dynamically tracks the evolving composition of the position as these trades occur.

To reclaim their assets, the liquidity provider must burn their Carbon LP Token. Redeeming (burning) the NFT returns the current holdings of the position, which may consist of the original deposited asset, the acquired asset, or a mix of both, plus any accumulated fees from executed trades. This mechanism ensures that the value and ownership of the liquidity are permanently and immutably tied to the NFT; losing control of the NFT equates to losing control of the underlying assets and any accrued fees.

This NFT-based design enables advanced features not possible with traditional LP tokens. Each position is isolated, allowing for highly granular strategy management—individual tokens can be modified, cloned, or have their fees compounded without affecting other users. The model also provides superior transparency, as the entire history and parameters of a liquidity position are verifiable on-chain through the NFT's metadata and the associated smart contract state.

A Liquidity Provider Token (LP Token) is a fungible digital asset that represents a user's share of a liquidity pool in an Automated Market Maker (AMM). When a user deposits an equal value of two tokens into a pool (e.g., ETH and USDC), the AMM protocol mints and sends LP tokens to the depositor's wallet. These tokens are a claim on the underlying pooled assets and any accrued trading fees, functioning as a tradable proof-of-deposit. The quantity of LP tokens a user receives is proportional to their contribution relative to the total pool liquidity.

The primary function of an LP token is to enable non-custodial ownership of a pool position. Holding the token grants the right to redeem the underlying assets at any time, plus a proportional share of the pool's accumulated trading fees. This mechanism allows liquidity providers to remain in full control of their capital without relying on a centralized custodian. LP tokens are also composable, meaning they can be used as collateral in other DeFi protocols for lending, borrowing, or yield farming strategies, creating layered financial incentives.

The value of an LP token is directly tied to the performance of its underlying pool through the concept of impermanent loss. As the market prices of the two pooled assets diverge, the value of the LP token position changes relative to simply holding the assets. LP token holders earn a return from trading fees, which are automatically added to the pool's reserves, increasing the value of each LP token over time. This creates a dynamic where providers are compensated for market-making services while assuming the risk of price volatility between the paired assets.

In practice, protocols like Uniswap issue standardized LP tokens (e.g., UNI-V2), while others, like the Carbon DeFi protocol, may issue their own branded versions (e.g., a Carbon LP Token). These tokens are often ERC-20 compatible, making them easily transferable and integrable across the Ethereum ecosystem. The redemption process, known as "burning" the LP tokens, returns the user's share of the pooled assets to their wallet, effectively closing their liquidity position and realizing any gains or losses.