DeFi 101: What Is Liquidity Mining And How Does It Work?

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 (P2P) manner. Currently, Aave has about 20 cryptocurrencies available, including DAI, ETH, BAT, MKR, SNX, USDT, USDC, TUSD, USDT, sUSD, BUSD, wBTC, ZRX, etc. Aave also has its own governance token, AAVE, which was preceded by another native token called LEND that was abandoned after a migration. Due to the lightning-fast development of blockchain technology, numerous separate entities have appeared, which liquidity mining can unite in one decentralized dimension. The technique is also able to speed up the frequency of value exchange and therefore promote price discovery.

Different DEXs have different designs, but they are usually quite similar. The next step is choosing the pair (for instance, a safe pair of USDT/BNB). Liquidity mining and staking are two distinct mechanisms used in decentralized finance (DeFi) to incentivize user participation and encourage the growth of DeFi ecosystems. Increasingly, new investment products are emerging that are organized in a decentralized manner. The complete automation of such protocols often makes them cheaper and more secure than conventional applications. Bitcoin and cryptocurrencies are once again in a strong upward trend and are thus attracting attention.

What Is Yield Farming?

New investment products, organized in a decentralized manner, are increasingly emerging. By fully automating such protocols, they are often designed more cheaply and securely than conventional applications. This article will explain what liquidity mining is, how it works, and how it allows users to earn.

  • AIGPT, a pioneering project in the field of Artificial Intelligence, is set to launch its much-anticipated liquidity mining program on August 19th.
  • This Ethereum-based pool offers liquidity services and functions as a non-custodial portfolio manager and price sensor.
  • For instance, you provide an exchange with a stack of USDT coins and receive other tokens as an APY.
  • Since then, the total value locked (TVL) for liquidity mining has hovered around $97 billion.
  • Despite being a relatively new phenomenon, liquidity mining has already proved to be an effective way for companies to increase trading activity.

As of June 20, 2020, the COMP token had a value of $ 313 USD and a capitalization exceeding $ 800 million USD. And not only that, the total blocked value (TVL) or cryptocurrency funds blocked in Compound reached over $ 511 million USD, reaching its current highest point, with a TVL that exceeds $ 900 million. You can lose money during liquidity mining if the crypto price of the token goes down, and you withdraw. As long as you don’t withdraw, you are, technically, not experiencing losses, as the price can still recover. Essentially, it happens when the developers decide to shut down the protocol, and not return the funds.

Risks of Liquidity Mining

Due to the mentioned benefits, assets with high liquidity are more attractive and less risky. As AIGPT prepares to launch its liquidity mining program on August 19th, the excitement is palpable. The fusion of cutting-edge AI technology and decentralized governance through the CZZ token showcases AIGPT’s dedication to innovation and community involvement.

what is liquidity mining

Additional profits may be generated through possible price increases of the tokens. An essential factor in this regard is the emergence of new trading venues. So far, trading in cryptocurrencies has only taken place on a centralized exchange (CEX). However, smart contracts might also create decentralized exchanges (DEX), which function automatically and autonomously. The term liquidity mining It comes because it is the injection of liquidity.

Maximize Your Crypto Portfolio

In addition, they regularly offer access to interest or rewards that are paid regularly to their holders. In this way, the more money they block on the platform, the more tokens they receive and the more rewards they obtain, thereby making higher profits. Not only will the coin or token (presumably) grow in value someday, but they could also earn you passive income.

what is liquidity mining

However, this method has risks that are not found in other types of mining, so you should be careful to provide your tokens to the liquidity pool, especially if the project promises high returns. Always check the platforms carefully and read the agreement to avoid unpleasant surprises. A popular passive income strategy to consider, along with liquidity mining, is staking. A consensus algorithm allows you to transfer your crypto assets as collateral as part of proof-of-stake (PoS) algorithms.