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How does LP Token farming work?

Liquidity providers (LP) contribute their assets to a liquidity pair at a decentralized exchange and receive LP tokens in return. These LP tokens can be deposited in a farming pool. Users who hold the token of the liquidity pairs will receive a percentage of the trading fees that are generated in this specific market. In addition, if they deposit their own token in one of these pools, they also earn rewards for being a part of it.

Simply put, it's a way to earn additional coins as a liquidity provider of a decentralized exchange. There is no intermediary in the financing process because smart contracts are used.

The Ethereum blockchain network is where the majority of the farming occurs. As a result, the payouts are made in the form of an ERC-20 token.