Liquidity Provider Token

Subtype

No asset of this subtype is currently listed on the Regen Atlas.

Definition: Liquidity Provider Tokens (LP Tokens) represent one's share of the fees earned by the liquidity pool of a DEX or AMM. When market making one or more green crypto-assets, the LP token deriving from the liquidity pool is in part or in full a green LP token.

Description

In principle, any LP token that contains at least one green crypto-asset is in part green. LP tokens are produced by adding liquidity to constant function market maker decentralized exchange protocols, such as Uniswap pools. LP tokens are similar to dynamically hedging options contracts. Uniswap’s algorithm replicates “the negative delta of long put options on the assets it holds as reserves through dynamic hedging… by incentivizing external traders to adjust the reserve quantities through price discrepancies with other exchanges.” Alternatively, LP tokens can be understood as “perpetual short straddle[s]… swap[s] of gamma risk for a perpetual stream of payments from trading fees.” Holding LP tokens that market make green assets is therefore a green derivative unique to Web3.

Example

The Klima/MCO2 LP token, previously available on QuickSwap, was an example of a green LP token that combined the benefits of decentralized finance with environmental impact. By providing liquidity to the Klima/MCO2 pair, users received LP tokens representing their share of the pool, which consisted of Klima tokens and MCO2 carbon credits. This LP token not only facilitated trading between these assets but also supported the broader goal of carbon offsetting.