What Is Liquidity Mining And Is It Worth It?

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Liquidity mining has the capacity to upend the allocation of resources and even enable investors and various financial institutions to reach more reasonable decisions based on price. 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. If you’re a crypto enthusiast who is always on the lookout for emerging trends within the DeFi and cryptocurrency space, then you should definitely home in on liquidity mining. This relatively new technique allowed the DeFi ecosystem to increase about 10 times in size during 2020, and this exponential growth is bound to continue in the future. Liquidity mining is an excellent way of earning passive income for the LPs, similar to passive stakeholders within staking networks.

Who Benefits From Liquidity Mining

It’s vital to realize that your yield is proportionate to the entire risk you accept with your investment before you start liquidity mining, making it a good strategy for any investor. If you make a significant investment, your returns will be proportional to your commitment. The same is true if you wish to dip your toes into the liquidity mining approach before completely committing. Security – blockchain networks and protocols are hacked on a fairly regular basis, and you want to minimize the risk of losing your investment by choosing a secure platform.

Open governance

To do this, check the project metrics, including the number of liquidity providers, total value locked , and available liquidity. If you’re technically inclined, you can also audit the protocol’s source code by checking its GitHub repository. Here, you want to see how many developers contribute to the project, the frequency and their identity. Passive income – liquidity mining is an excellent means of earning passive income for the LPs, similar to how passive stakeholders within staking networks. Staking is an overarching category of all activities and different ways to earn rewards from owning certain cryptocurrencies.

Who Benefits From Liquidity Mining

Liquidity mining can be a good idea, especially since it’s extremely popular among investors as it generates passive revenue. This means that you can profit what is liquidity mining from liquidity mining without having to make active investment decisions. The following are some other advantages of liquidity mining in crypto.

The Advantages of Liquidity Mining

She showed me a screenshot of her “earnings” so I looked up ethliquidity8, which i spotted at the top of her screenshot and it brought me to a scam investigation website. Organized rings use fake apps, malicious smart contracts, and lure of big returns to swindle victims out of their savings. Providing liquidity does not result in the user losing control of his assets nor does it amount to a sale. The mere receipt of an LP token representing ownership of assets is not disposal. In addition, there is also a possibility that the assets when removed from a pool may not be in the same proportion as they were during the deposit. Hence this stance from a tax point of view would be most appropriate.

Who Benefits From Liquidity Mining

Use this guide to help you avoid any nasty surprises when it comes to the taxation of your liquidity mining income. The liquidity mining model pioneered by Synthetix marked a noteworthy milestone in the industry, paving the way for other projects to adopt similar approaches. One such project was Compound, a decentralized money market that incentivizes users with COMP tokens for both lending and borrowing capital on their application. This distribution model was a hugely beneficial strategy for Compound as it increased the value of the protocol by attracting more assets to their pools. If that liquidity provider sells now, the impermanent loss would become permanent. Leaving the tokens in the pool makes it possible to see that impermanent loss disappear.


Always conduct your research before making financial commitments, especially with third-party reviews, presales, and other opportunities. While all of the above sounds appealing, there are certain drawbacks to liquidity mining too. There is no such thing as a free lunch, especially in the crypto industry. Impermanent loss is often negligible in pools with high volume and low volatility. An example of the latter is an exchange that deals only with stablecoin.

Who Benefits From Liquidity Mining

“Can you write down this secret phrase I’m about to give you, which was just something on my desk, and take a selfie with that note. At least I would know this was someone real but didnt prove much more than that. But I knew how she reacted that she was a scammer herself and probably mad that she didnt snatch my wallet first. She refused to send a pic and started to blame me of accusing her of blame which I didnt. She continued to get mad at me, extending the idea that she was not who she said she was. Oct. 31st 2022, my husband received a text from an unknown caller asking, “What are you wearing?

Final thoughts: Is Liquidity Mining Worth It?

Before the concept of decentralized finance, order books were the most common trading model. If a liquidity provider takes out its crypto before its value has increased, it will lose out on making more profit. You can also still receive rewards from other liquidity pool trading pairs until the balance is restored. Liquidity pools keep the decentralized exchange stable by preventing slippage.

  • Impermanent loss is defined as the opportunity cost of holding onto an asset for speculative purposes versus providing it as liquidity to earn fees.
  • When traders place orders on the market, they are matched with other traders who are looking to make the same trade.
  • This causes mistrust in the markets as some trading pairs might be at risk of manipulation by just a few entities.
  • Decentralized exchanges have a specific governance model which allows user participation through voting.
  • Calculating and predicting IL may be an entirely different story, but the basic functioning of impermanent loss is relatively simple.
  • She was vague about many details btu I thought maybe it was the language barrier.

Consequently, while the token swapper pays a fee to be given an opportunity to trade on a DEX, the liquidity provider manages to earn money for providing the much sought after liquidity that the user needs. Uniswap is an automated market maker protocol that uses a simple pricing algorithm based on the ratio of the asset reserves in a pool. Users can swap between ERC-20 tokens or provide liquidity to a pool and earn rewards in the form of trading fees. Uniswap is one of the most popular DEXs in the cryptocurrency ecosystem and has played a significant role in the growth of decentralized finance . Sushiswap is a decentralized exchange that forked from Uniswap in 2020. It operates similarly to Uniswap and allows users to swap between ERC-20 tokens or provide liquidity to a pool and earn rewards in the form of trading fees.

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The rewards are distributed proportionally to the amount of liquidity provided, and the longer the liquidity is held, the higher the rewards can be. For instance, when you provide two volatile crypto assets as liquidity, it may offer greater rewards than providing two stablecoins. Stablecoins do not substantially https://xcritical.com/ fluctuate in value, but volatile assets like Binance Coin , among many others, can fluctuate by 10% or more at any time. Once participants give liquidity to a liquidity pool, they can earn rewards. These rewards are known as “LP” rewards, and they are allocated among liquidity providers based on their pool share.

Drawbacks of Liquidity Mining

Liquidity mining is a process in which a cryptocurrency exchange or protocol incentivizes users to provide liquidity to a particular market by offering rewards in the form of tokens. These rewards are given to users who supply assets to a market, making it easier for others to buy and sell those assets. In the volatile world of cryptocurrency, liquidity mining may be the solution.

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