The proliferation of both liquidity mining and decentralized finance, or DeFi, has surprised even eternal industry optimists . Today, the market capitalization for DeFi stands at over $80 billion, with a total value locked of over $67 billion (compared with the $5.4 billion raised by ICOs in all of 2017). While liquidity mining was only first implemented at scale in mid-2020, it is clear a new boom has been born. Here are some of the promising advantages of liquidity farming or mining.

How Does Liquidity Mining Work

The entire liquidity pool earns rewards for providing that liquidity and your rewards are proportional to your contribution. So, if your crypto accounts for 1% of all the crypto in the liquidity pool, you would earn 1% of the pool’s rewards. Those rewards typically come directly from transaction fees on the exchange.

This form of trade is generally governed by smart contracts and algorithms and is not owned by a single entity. Liquidity mining has become quite popular among investors because it generates passive income, implying that you may profit from it without making active investing decisions. The value of your stake in a liquidity pool determines your overall benefits. The use of blockchain and cryptocurrencies has exploded in recent years.

Liquidity Mining

Once earned, the incentive tokens can be put into additional liquidity pools to continue earning rewards. However, the fundamental concept is that a liquidity provider contributes money to a liquidity pool and receives compensation in return. If tokens in the liquidity pool were lost in the liquidation process, the benefits of governance access that came with having that token would be lost. Liquidation or impermanent loss occurs when the value of the token that was invested into the liquidity pool loses a certain amount of value the DEX will liquidate. This means the platform sells the shares of the liquidity pools to mitigate losses. Liquidity mining is similar to staking in that it requires no upfront investment and returns rewards as soon as there is sufficient demand for the underlying platform.

How Does Liquidity Mining Work

Besides fees, releasing a new token may play a role in encouraging money to be contributed to a liquidity pool. For instance, a token might only be available in modest quantities on the open market. On the other hand, it can be generated by giving a certain pool some liquidity.

Open Governance

Protocols that purchase their own liquidity would obtain revenue from trading fees but would also bear the risk of impermanent loss. That’s why you see that actually in the liquidity mining rewards, which is interesting because that’s basically the market telling you what is the cost of putting assets in there. If you want to get a feeling for that, just look at the reward of different Uniswap puts and different balancer pools pay you. The more you can earn the more vested the reward, the market demands in order to be in that pool. Yes, and this is encoded in many smart contracts, although not all of them. Cases have already happened where a user opened his wallet and found out that all his tokens had disappeared.

How Does Liquidity Mining Work

Yield farming is a way to earn extra financial rewards with crypto holdings. There is also a Proof of Work algorithm used by security-optimized blockchains. On Proof-of-Work algorithms, one must perform some sort of task that helps keep the blockchain working to receive benefits. The tasks performed are usually mining, running a validator node, or verifying transactions. Having governance access to a token is important to someone who believes in a project and wants to be a part of the growth of the token’s ecosystem.

Frequently Asked Questions On Liquidity Mining

They enable decentralized trading, lending, yield generation, and much more. These smart contracts power almost every part of DeFi, and they will most likely continue to do so. Another emerging DeFi sector is insurance against smart contract risk.

The Securities and Exchange Commission now regulates some digital assets since it has determined that they are securities. State officials have already filed suspension and cease transactions against centralized cryptocurrency lending platforms like BlockFi, Celsius, and others. If the SEC classifies DeFi loans and borrowing as securities, the ecosystems of lending and borrowing may drop significantly. Placing your assets into a liquidity pool is the only necessary step for participation in a specific pool. It is similar to transferring cryptocurrency from one wallet to the other. One of the two assets could be contributed to the pool by an investor.

When a user deposits assets into a Liquidity Pool, they receive LP tokens. So far, we’ve mostly discussed AMMs, which have been the most popular use of liquidity pools. However, as we’ve said, pooling liquidity is a profoundly simple concept, so it can be used in a number of different ways. Of course, the liquidity has to come from somewhere, and anyone can be a liquidity provider, so they could be viewed as your counterparty in some sense. But, it’s not the same as in the case of the order book model, as you’re interacting with the contract that governs the pool.

How Does Liquidity Mining Work

Liquidity mining with Bitcoin and other cryptocurrencies started on these platforms with facilities for token swapping. Token swaps allowed the possibility of trading one token for another one in a liquidity pool. Users had to pay specific fees for every trade, such as 0.3% of the value of swapped tokens on Uniswap.

The process is entirely decentralized and does not require any kind of KYC documentation. Impermanent loss is defined as the opportunity cost of holding onto an asset for speculative purposes versus providing it as liquidity to earn fees. Nothing contained in this website should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.

Maximize Your Crypto Portfolio

The most popular are UniSwap and Balancer, which support Ethereum and Ether-related tokens on the ERC-20 standard. PancakeSwap is another popular DEX where you can liquidity mine with support for Binance Smart Chain-based assets. Essentially, the liquidity providers deposit their assets into a liquidity pool from which traders will access desirable tokens and pay trading fees for exchanging their assets on a decentralized platform. Security risks – technical vulnerabilities could cause hackers to take advantage of DeFi protocols to steal funds and cause havoc. Such security incidents are common within the cryptocurrency space because most projects are open source, with the underlying code publicly available for viewing.

What is PoW Ethereum (ETHW), and how does it work? – Cointelegraph

What is PoW Ethereum (ETHW), and how does it work?.

Posted: Tue, 04 Oct 2022 13:55:00 GMT [source]

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However, the volatility of the cryptocurrency market means that you should be at least somewhat cautious when depositing your money into DEXs. A core benefit of DeFi liquidity mining is that it allows for the relatively equitable distribution of governance via native tokens. Before What Is Liquidity Mining liquidity mining of crypto existed, token distribution was largely unfair and imbalanced. In many cases, DeFi protocol developers would favor institutional investors over low-capital investors, due to the amount of funds that institutional investors had at their disposal.

It is arguably the best alternative to UniSwap out there, offering better terms for both liquidity providers and traders alike. This leads to a more inclusive model where even the small investors get to contribute to the development of a marketplace. Again, the liquidity provided to Uniswap will be granted to clients who trade assets from the ETH/USDT liquidity pool. These fees are then collected and distributed to liquidity providers .

Just deposit cryptocurrencies in liquidity pools containing trading pairs and earn LP tokens. The LP tokens represent the share of your contribution in the liquidity mining pool and are essential tools for liquidity farming. The most successful decentralized exchange to date is Uniswap with over $9 billion in crypto assets staked for liquidity on its platform. Uniswap is an Ethereum-based protocol that uses smart contracts to hold crypto assets in liquidity pools, allowing for investors to trade cryptocurrencies directly from their Ethereum wallet. However, Ethereum gas fees have been extremely expensive as of late, so these programs are shifting toward layer 2 scaling solutions to lower the trading costs for investors.

Invite & Earn

When you decide to withdraw from the pool you’ll simply need to select ‘Remove Liquidity’ and select the amount you’d like to withdraw. Once here you’ll see a few options for your unbonding period (i.e. the amount of days it takes to remove your tokens from the pool if you decide to withdraw). The longer you choose to bond your tokens, the higher the rewards you’ll be eligible to earn. Once you’ve agreed to terms and you’re ‘in the lab’ you’ll see some trading pairs and a button to connect your wallet .

Uniswap has no such incentives at this time, and some other platforms do not offer native rewards either. Additionally, these tokens fluctuate in value, too, affecting potential earnings. Decentralized finance is an exciting industry that has given rise to many new concepts. One such concept is liquidity mining, an opportunity for existing crypto users to put their assets to work. While liquidity mining carries some risks, many people seem to favor this approach.

  • The way I think about liquidity mining is basically a generalization of that concept as it relates to providing financial liquidity.
  • Because of this, it’s true to say that off-chain order book DEXs are only partially decentralized.
  • Transaction depth is generally used to describe the degree of market price stability.
  • Read on to find out more about how liquidity mining works, what functions it performs, and which protocols have been making the most of it.
  • Since everyone can engage in liquidity mining regardless of their stake, everyone has the opportunity to collect the governing tokens and use them to vote on project-related development proposals and other actions.
  • As previously said, everyone may benefit from this investment technique.

We are a private de-facto organization working individually and proliferating Blockchain technology globally. If you aspire to become a certified professional in the blockchain domain, then Blockchain Council’s certification courses are available at your service. These courses are designed to provide theoretical as well as in-field knowledge to the candidates. There are around 120 DeFi platforms with over $80 billion in TVL, according to DeFipulse.

Distributing tokens to liquidity providers is the primary mechanism for initially inviting the needed liquidity. The tokens have more value than the face value of the coin by offering yield — and often governance rights — incentivizing both a sense of ownership in the project and longer-term retention. More liquidity attracts more users, and more users provide more financial payback to liquidity providers, creating a continuous positive feedback loop. Compound is a decentralized Ethereum-based protocol that supports the lending and borrowing of particular cryptocurrencies such as Dai , Ether , USD Coin , Tether , Wrapped BTC , Basic Attention Token , Augur , and Sai . It relieves all crypto owners from dealing with traditional financial intermediaries and saves a lot of time and effort. ” is much more important to understand if you’re thinking about placing some of your cryptocurrency assets into liquidity pools.

Farming With Lp Tokens

This has caused an endless cycle of dumping and farming for the next attractive token. The sell pressure followed by the dumping further impacts the token price and jeopardizes the overall sustainability of the protocol. Therefore, subsidized bootstrapping may not always play out as intended. When the work that you do is providing liquidity and it’s yield farming when it’s, that’s basically what the user called and said, when it feels like putting money in the bank account and then getting some Ute for it. That’s I haven’t really seen it to you as an in when the work is not just providing liquidity. Like any investment, there is risk involved with providing liquidity on Uniswap.

By depositing their assets into the Defi platforms, the make it easier for traders to get into and out of positions with the trading fees partly used to reward them. Decentralized finance is a new fintech application that seeks to disrupt traditional financial markets using decentralized networks such as blockchains. DeFi platforms work by eliminating centralized financial intermediaries allowing market participants to interact in a peer-to-peer manner. You can pick one of several reward tiers tied to different interest rates charged to traders who actually make use of the digital funds you’re providing. Very common cryptocurrencies and stablecoins typically lean toward the lower end of the pool fees; rare and exotic coins often carry higher fees.


Liquidity mining can be a very lucrative investment, with annual interest rates often measured in double- or triple-digit percentages. Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.

Staking on every platform is different in the amount of time that is required to stake. Stakers are paid interest on their stake in the form of the token provided. It can also be a different token that is native to that DEX/platform, if applicable. The scammer will do this so that the liquidity provider trusts the DEX/platform.