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What Is Liquidity Mining: How to Profit from a Decentralized Ecosystem

It’s a concept borrowed from traditional finance that involves dividing up financial products based on their risks and returns. As you’d expect, these products allow LPs https://xcritical.com/ to select customized risk and return profiles. In some cases, there’s a very high threshold of token votes needed to be able to put forward a formal governance proposal.

Token holders help stock exchanges get liquidity and thus earn money or tokens. Liquidity pools are revolutionary as they eliminate the need for a centralized order book. They can then take that cUSDT and put it into a liquidity pool that takes cUSDT on Balancer, an AMM that allows users to set up self-rebalancing crypto index funds. In normal times, this could earn a small amount more in transaction fees. The user looks for edge cases in the system to eke out as much yield as they can across as many products as it will work on. A DEX is a blockchain-based marketplace where peer-to-peer crypto transactions take place without the need for an intermediary.

The capabilities and benefits of liquidity mining

Like its main rival, Balancer LPs and traders will need to use a supported Ether wallet to access and interact with the exchange. Balancer is another Ethereum-focused decentralized exchange giving UniSwap a run for its money. It is arguably the best alternative to UniSwap out there, offering better terms for both liquidity providers and traders alike. Functionality – a majority of DeFi platforms support Ethereum-based tokens exclusively. If you need to provide liquidity for a token that is not hosted on Ethereum, you want to look for a DEX that supports the token in which you are interested.

liquidity mining definition

The low spread indicates that you can buy and sell an asset with minimal losses almost instantly. If liquidity is high, the spread usually does not exceed a tenth of a percent of the asset’s market value. The number of companies offering smart contract security audits and testing is rising. Reputable platforms often subject their services to a slew of audits, the findings of which are made public. CeFi – stands for centralized finance, and it refers to the institutions within the cryptocurrency market that offer financial services.

Best Liquidity Mining Platforms

Behind the scenes, this means Uniswap can make it look like it is making a direct trade for any two tokens, which makes it easy for users, but it’s all built around pools of two tokens. If the terms “yield farming,” “DeFi” and “liquidity mining” and are all Greek to you, fear not. Liquidity mining pool developed equal opportunities for institutional as well as low-capital investors. As a result, you can get massive relief from any concerns of favoritism. In addition, the exchange rate losses magnified by the fixed period deposits on certain protocols can increase the risk for the users. The cryptocurrency world is undoubtedly gaining popularity and setting new boundaries every day.

On top of that, a lot of liquidity pools provide additional incentives for LPs by offering liquidity mining programs. Liquidity mining, in essence, is a way of rewarding LPs with extra tokens for providing liquidity to certain pools or using a protocol. The value of the additional tokens in some cases can completely negate the value lost by impermanent loss, making providing liquidity highly lucrative. If you want to learn more about yield farming and liquidity mining you can check out this article. You can still make profits by simply trading DeFi assets and rebalancing portfolios that hold the governance tokens of your dearest lending or DEX protocols.

  • The impact of huge trades can only be mitigated if a pool has enough liquidity.
  • These liquid stocks are usually identifiable by their daily volume, which can be in the millions, or even hundreds of millions, of shares.
  • As most ecosystems provide their communities with a governance model, additional benefits such as voting rights can further incentivize liquidity mining.
  • Participants on the platform might exchange it or utilize it for other reasons.
  • Cronje and Sestagalli are collaborating on an unreleased Fantom-based project currently being referred to as ve – a mashup of the shorthand for venomics and Olympus’ staking program.

If ETH goes up in value, the pool has to rely on arbitrageurs continually ensuring that the pool price reflects the real-world price to maintain the same value of both tokens in the pool. This basically leads to a situation where profit from the token that appreciated in value is taken away from the liquidity provider. At this point, if the LP decides to withdraw their liquidity, the impermanent loss becomes permanent. The commonalities of staking, liquidity mining, and yield farming are obvious, users are financially rewarded for supporting something.

Tip: Learn how to earn passive reward income on Uniswap v3

For each completed transaction, the commission is distributed among all holders of LP tokens. Consequently, liquidity pools allow you to earn passive income from your investments. Accordingly, protocols can incentivize token holders to join the liquidity pool by rewarding them with additional tokens. Uniswap is a decentralized exchange protocol that runs on the Ethereum blockchain.

liquidity mining definition

Securities that are traded over-the-counter such as certain complex derivatives are often quite illiquid. For individuals, a home, a timeshare, or a car are all somewhat illiquid in that it may take several weeks to months to find a buyer, and several more weeks to finalize the transaction and receive payment. Moreover, broker fees tend to be quite large (e.g., 5-7% on average for a realtor). Current, quick, and cash ratios are most commonly used to measure liquidity. A smart contract can withdraw any amount of any token from your address at any time. The figure below illustrates how remunerations are accrued to market makers.

So who provides market liquidity?

Georgia Weston is one of the most prolific thinkers in the blockchain space. In the past years, she came up with many clever ideas that brought scalability, anonymity and more features to the open blockchains. She has a keen interest in topics like Blockchain, NFTs, Defis, etc., and is currently working with 101 Blockchains as a content writer and customer relationship specialist. Each time a user makes use of such a function, he/she will pay a certain fee.

If an asset lent to the decentralized exchange gains too much value in a very short time, the user can lose a lot of money. For instance, ETH can double in just four days but the fees provided while farming it will not even cover 50% of what you would have made by HODLing. The primary driver behind 2020’s “DeFi Summer” craze, liquidity mining refers to the practice of a protocol incentivizing user deposits with token rewards. Many projects launch their platforms in a rush and don’t spend more than a month on development.

For instance, DeFi lending protocols provide higher interest rates for deposits and even lower fees, along with more favorable terms on loans. “Liquidity” is a concept borrowed from the traditional stock exchanges. In cryptocurrency markets, higher liquidity means quicker and easier token swap.

liquidity mining definition

If an exchange has a high volume of trade that is not dominated by selling, the price a buyer offers per share and the price the seller is willing to accept will be fairly close to each other. Market liquidity refers to the extent to which a market, such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable, transparent prices. In the example above, the market for refrigerators in exchange for rare books is so illiquid that, for all intents and purposes, it does not exist.

Liquidity Mining Definition

Right now, the deal is too good for certain funds to resist, so they are moving a lot of money into these protocols to liquidity mine all the new governance tokens they can. But the funds – entities that pool the resources of typically well-to-do crypto investors – are also hedging. Nexus Mutual, a DeFi insurance provider of sorts, told CoinDesk it has maxed out its available coverage on these liquidity applications. Opyn, the trustless derivatives maker, created a way to short COMP, just in case this game comes to naught. As usual in crypto, when entrepreneurs see something successful, they imitate it. Balancer was the next protocol to start distributing a governance token, BAL, to liquidity providers.

Definition of liquidity mining

After you sign up and connect your first exchange account, you’ll deploy an investment-maximizing strategy in as few as 5-minutes. Each day Shrimpy executes over 200,000 automated trades on behalf of our investor community. 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.

Supporting platforms

Instead, you’re executing the trade against the liquidity in the liquidity pool. For the buyer to buy, there doesn’t need to be a seller at that particular moment, only sufficient liquidity in the pool. In general, liquidity mining is a derivative of yield farming, which is a derivative of staking. All the solutions are just methods for putting idle crypto-assets to use. The main goal of staking is to keep the blockchain network secure; yield farming is to generate maximum yields, and liquidity mining is to supply liquidity to the DeFi protocols.

The motivation to reward you for doing this is to secure the present and future of the particular technology you are staking on. You make available to the network some of your assets in POS Staking and earn a certain amount of reward coins for the value you create . To ensure that traders’ what is liquidity mining needs are always met, DEX’es like Uniswap reward their users for filling pools with liquidity and serving as so-called “Liquidity Providers” (LP’s). Similarly, sellers should always be able to meet willing buyers so that uninterrupted trading with high volumes is possible.

Liquidity mining is a way to earn rewards by providing liquidity to other traders. The opportunities offered by liquidity mining are numerous and can be very lucrative, but some risks should be considered. The increased demand of liquidity mining in DeFi applications will inevitably lead to increasing demand of smart contracts. As a result, the need for smart contract insurance such as Nexus Mutual or Opyn is also likely to increase.

When the spread between the bid and ask prices tightens, the market is more liquid, when it grows the market instead becomes more illiquid. Markets for real estate are usually far less liquid than stock markets. The liquidity of markets for other assets, such as derivatives, contracts, currencies, or commodities, often depends on their size, and how many open exchanges exist for them to be traded on. It was the first time in the history of finance when liquidity mining allowed ordinary users to find themselves on the other side of the market. Brokers do not provide liquidity – they only provide access to trading on various exchanges, and liquidity is supplied to them by exchanges, banks, and other organizations, in particular, private investors.

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