DeFi 101: The History of Liquidity Mining by Vesper Finance Vesper Finance Mar, 2023

The next step is choosing the pair (for instance, a safe pair of USDT/BNB). You should set up a non-custodial wallet for liquidity mining and deposit some BNB coins there. Custodial wallets are not suitable for liquidity mining as they involve a third party which should not be the case for DEXs. A tool designed to help LPs find the best yield opportunities across all protocols, chains, and assets.

liquidity mining crypto

The potential annual percentage yields can be quite attractive, with numerous options to choose from. However, it’s essential to exercise caution by investigating the potential risks, understanding why your tokens are needed, and comprehending how returns are generated. It has opportunities for institutional investors, professionals, and amateurs. Over ten-plus years, crypto enthusiasts earned money via holding crypto coins, mining them, trading them, staking, etc. One of the later ways to make money through crypto is by participating in liquidity mining.

Premium Investing Services

Yield mining is a more complex type of passive income through cryptocurrencies. It involves such ways of earning as staking preferred assets and the governance tokens of the DeFi platform. Liquidity mining is more straightforward, but it can’t offer as big returns as yield mining. Liquidity pools emerged as a solution to the problem of low liquidity on decentralized exchanges. Liquidity mining gives DeFi platforms much-needed liquidity while people who provide it get rewards in return. Please read the full article to learn everything you need to know about liquidity mining.

liquidity mining crypto

Of course, if the token you placed in a liquidity pool drops in value, you could wait for an increase in value before withdrawing it from the liquidity pool. The most recent incident that is experienced within the DeFi space is the Compounder Finance rug pull that saw investors lose close to $12.5 million. Yield farmers earn additional cryptocurrency by receiving a portion of the fees generated by the DeFi protocol they are participating in.

Incentives for Liquidity Providers

Liquidity mining is a relatively new concept, and it is still unclear whether or not it is profitable in the long run. Some experts have argued that liquidity mining can be quite profitable, especially in volatile markets. Others have argued that the rewards are not worth the risk, and that liquidity mining can actually lead to losses.

  • On DEXs, people exchange their assets without the participation of intermediaries.
  • The liquidity mining model pioneered by Synthetix marked a noteworthy milestone in the industry, paving the way for other projects to adopt similar approaches.
  • Those rewards typically come directly from transaction fees on the exchange.
  • However, it’s essential to exercise caution by investigating the potential risks, understanding why your tokens are needed, and comprehending how returns are generated.
  • But I knew how she reacted that she was a scammer herself and probably mad that she didnt snatch my wallet first.

In either case, you lock up your cryptocurrency in a specific location and earn rewards in the form of additional crypto in return for doing so. A liquidity mining process rewards traders for providing liquidity to a trading pair. Typically, the reward is the asset being traded, but it can also be another cryptocurrency or even fiat currency. All three methods – staking, yield farming, and liquidity mining – are just ways to put investor’s crypto-assets to use and earn a passive income. Liquidity mining is a mechanism or process in which participants supply cryptocurrencies into liquidity pools, and are rewarded with fees and tokens based on their share. Staking is the process of holding a cryptocurrency asset in a designated wallet for a specified period to earn rewards in the form of more of the same cryptocurrency or other assets.


Yield farming offers higher returns than staking, as it involves moving your cryptocurrencies between different liquidity pools to find the best ROI. Liquidity mining offers the highest returns, as it involves providing liquidity to a specific cryptocurrency to increase its liquidity. Another benefit of yield farming is the opportunity to diversify your cryptocurrency portfolio.

With liquidity mining, you also get the added bonus of the equal distribution of governance through native tokens. Before liquidity mining, the allocation of tokens was largely unjust and uneven. The developers of DeFi protocols would also often prioritize investment firms and ignore low-capital investors. The story behind decentralized finance is an exciting and interesting one, and the field itself has spawned numerous innovative ideas, one of which is liquidity mining. Also known as DEX mining, DeFi mining, or DeFi liquidity mining, crypto liquidity mining is just one of many ways in which crypto users can put their assets to work for them. Simply put, if the price of your cryptocurrency changes too much after you put it into the cryptocurrency pool, you may end up with a lower overall value.

Certified Web3 Community Expert™ Interactive Live Training

Liquidity mining is similar to providing liquidity in the fact that both involve providing liquidity to a DEX. However, the process of liquidity farming or mining involves LP tokens or liquidity provider tokens you get for offering liquidity. Interestingly, the mining rewards are derived directly from the incentives for liquidity provision on the platform.

liquidity mining crypto

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. Another risk that applies to decentralized exchanges is misleading information and price manipulation by whales. Such manipulation is speculated to be the bi-product of inside information being utilized. This causes mistrust in the markets as some trading pairs might be at risk of manipulation by just a few entities.

Motley Fool Returns

Transactions made on these exchanges can be completely anonymous and will never involve a profit-seeking intermediary such as a bank or a financial services company. DEXes are seen as a crucial ingredient in truly decentralized finance systems. A blockchain is a series of “blocks” of data, with each block containing a series of transactions. Thus, the acceptance of a new block’s validity and addition to the chain is a means for the network to achieve consensus on the “state” of the chain (i.e., on the transaction history that has occurred). In addition, this consensus mechanism also makes is difficult for a single bad actor to tamper with the blockchain.

Time-Tested Tips to Make Money on the Stock Market Explained

Ultimately, it is up to each individual trader to decide whether or not they believe that liquidity mining is profitable. There is a good chance that liquidity mining will become more prevalent what is liquidity mining in the crypto world as more exchanges adopt this model. As a result, users would be directly rewarded for providing liquidity, which could change the way crypto assets are traded.

Please share, follow and like us on: