LIQUIDITY MINING: WHAT IS IT, HOW DOES IT WORK AND HOW by Cache DEFI Project Medium

Probably, 2020 was the peak year for liquidity mining as in the following years. The liquidity of funds is considered to be the vital element of the liquidity of the entire economic system. Compared to conventional industries, DeFi doesn’t possess a self-built capital pool that would grant stable liquidity. Transactions on DEXes can be completely anonymous and avoid profit-seeking intermediaries like banks or financial services companies. Once you have your crypto assets in your wallet, go to the Uniswap pool page, click on ‘New Position’, select the crypto assets that you purchased from KuCoin, and add liquidity.

Yield farming is closely related to liquidity mining, but it’s not the same thing. This is a broader strategy, tapping into many different DeFi products to produce generous APY returns. You collect your liquidity tokens, then sit back and wait for the rewards to roll in.

What is liquidity mining and how does it work

In 2020, numerous projects focusing on decentralized finance (DeFi) were able to generate high price gains. One example of this is Yearn.Finance, whose token was able to rise to around 48,000 US dollars at times. In exchange for liquidity, the user earns a reward from the exchange or dApp in cryptocurrency made possible by charging a small fee from users. Since digital assets are extremely volatile, it is almost impossible to avoid IL. If an asset within the LP of choice loses or gains too much value after being deposited, the user is at risk of not profiting or even losing money. For example, Ethereum can double in value within 5 days but the fees granted while farming it will not even cover half of what one would have made by HODLing.

What is liquidity mining and how does it work

As a liquidity miner (or provider), an investor could opt to deposit either asset into the pool. Liquidity Mining is one of the most common forms of yield farming where investors can earn a steady stream of passive income. In this guide, we will discuss what it is, including the risks and benefits for investors who engage in the practice. Not only that, but we also highlight some of the best Liquidity Mining platforms for anyone looking to make use of their packaged cryptocurrency. To start liquidity mining, users need to have cryptocurrencies that are compatible with the platform and the liquidity reservoir.

  • Insider trading is a big problem across multiple markets, including crypto and liquidity mining in particular.
  • The most popular are UniSwap and Balancer, which support Ethereum and Ether-related tokens on the ERC-20 standard.
  • The LPs invest their cryptocurrency into liquidity pools, which in turn provide liquidity to the platform.
  • Liquidity providers receive rewards in the form of tokens, which are specific to the platform they are providing liquidity too.
  • These differ from central exchanges (CEX) in that no company runs and manages the platform.

In many ways, liquidity mining is like holding your money in the bank in return for yielding an interest rate. Liquidity mining is about providing your crypto tokens to decentralized exchanges (or DeFi platforms), so they will have better liquidity, and you will receive a specified annual yield (APY) as a reward. The tokens you hold on a decentralized exchange feed the platform’s liquidity, allowing anonymous traders to exchange coins. Curve was introduced in 2020 as an attempt to offer an advanced automated market maker exchange with low fees for traders and substantial savings for liquidity providers. Curve focuses mainly on stablecoins, therefore granting investors an opportunity to evade more volatile crypto assets and earn high interest rates from their lending protocols. According to DeFi Llama, Curve is the largest protocol with TVL of more than $20 billion.

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They embraced new entrants to the active IPO arena, such as Turkey and Romania, in addition to the already thriving countries like Indonesia, Malaysia and India. In developed markets, the US witnessed a higher number of larger deals, while Japan and Italy contributed to the growth of smaller deals. Learn here the details on how we do market making for many successful projects in the crypto space. Shares of large companies that trade on the stock exchange tend to be highly liquid due to active trading and broad investor interest.

As a result, the demand for smart contract insurance such as Nexus Mutual or Opyn is expected to increase. The enormous growth in DeFi apps and governance tokens will increase the need for clear data aggregators and dashboards. In conclusion, liquidity mining is a mechanism used in DeFi to incentivize individuals to provide liquidity to financial products, such as exchanges and lending platforms. Liquidity mining is an important part of the DeFi ecosystem, as it provides much-needed liquidity to decentralized exchanges and helps to promote the growth and development of DeFi platforms. The rewards received by the liquidity provider are generated by the fees collected by the platform, such as trading fees, borrowing fees, and interest earned from lending activities.

Liquidity is a measure of the availability of buyers and sellers and the ability to execute trades quickly and at fair prices. For example, popular cryptocurrency exchanges have higher trading volumes and more participants, making it easier to buy or sell cryptocurrencies and execute trades. The process of liquidity mining closely resembles the crypto mining procedure in its principle.

When deciding between these two options, investors must understand the potential benefits and risks involved in both investments. It is a key way for DeFi platforms to provide financial services and products to their users, while also providing liquidity providers with rewards and benefits. However, like any investment, it is important to carefully consider the risks and do thorough research before participating in liquidity mining. Uniswap is a decentralized exchange protocol that runs on the Ethereum blockchain.

what is liquidity mining

This means there’s a greater chance of finding someone to buy or sell your cryptocurrency without significantly affecting its price. Liquidity providers add assets, such as cryptocurrencies or stablecoins, to a pool on the DEX, making it easier for other users to trade and exchange those assets. The profitability of liquidity mining is therefore dependent on the fees generated by the platform and the overall size of the liquidity pool. You earn incentives in crypto liquidity mining by allowing a decentralized trading service to work with part of your cryptocurrency tokens. Decentralized exchanges are crucial for traders that don’t want to share their data with third parties. It can be helpful for the residents of the countries that are not provided the service on most platforms and for other groups of traders.

A healthy 97% of companies across all sectors have undertaken at least one initiative to engage customers. The VCN is an open digital platform that helps businesses understand the complex nature of their scope 3 emissions through interactive tracking, tools and tailored recommendations. Direct ownership of real estate and cars can be relatively illiquid, as it can take time and effort to buy or sell them. Contact us any time and we’ll be more than happy to embark on an exciting journey with you around the DeFi world and ensure that your project will be a roaring success. As well as this, Uniswap has its own native token called UNI, which entitles its owners to governance rights.

What is liquidity mining and how does it work

As of writing, over $55.05 billion of collateralized assets are locked in various DeFi protocols, providing liquidity across the DeFi ecosystem. At its peak this year, the Total Value Locked (TVL) for providing liquidity across the DeFi protocols exceeded $88.6 billion. From a DeFi ecosystem perspective, liquidity mining can be beneficial as it can lead to increased liquidity in DEXs, making it easier for users to trade and improving the overall health of the exchange. Liquidity mining can also attract new users to DeFi, contributing to its growth and development.

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