30 May 2022
2 min read
Over the years, the enormous growth of bitcoin and blockchain has been phenomenal. Decentralised Finance (DeFi), a blockchain-based finance platform that eliminates centralised financial middlemen is the prime reason for this rapid growth.
Although being decentralised, it nevertheless provides investors with multiple alternatives for passive income, making it unique. Liquidity mining is one of these methods.
What exactly is liquidity mining, and how might it help DeFi? Let us understand this further.
What is Liquidity Mining?
Liquidity mining is an investing approach in which DeFi protocol participants donate their crypto assets in order to make it easier for others to trade on the platform. Participants receive a percentage of the platform’s fees or newly created tokens in exchange for their contributions.
Now, because a DEX demands liquidity to facilitate trading between distinct token pairs, this incentive technique allows users to provide liquidity to help facilitate those trades. It means that the majority of liquidity pools are between trading pairs, with users depositing one of two cryptocurrencies depending on the pool.
In 2020, the compound received a positive response after unveiling the DeFi Liquidity Mining concept. Total value locked (TVL) for liquidity mining has hovered around $97 billion after its inaugural.
$97 billion! Isn’t the amount huge? But that is major because anyone can adopt this method. It is also one of the key reasons for its appeal among trade participants.
What are some benefits of liquidity mining?
Liquidity mining has turned out to be quite a beneficial investment strategy. It not only aids the liquidity providers but also, the DeFi platforms and the blockchain community. Let’s have a look at some of its benefits down below.
1. Distribution of Native Tokens
Providing liquidity mining gave both institutional and low-capital investors a fair probability. If you put money into a liquidity pool, you may receive benefits in terms of native tokens that you can use to vote, depending on the protocol and farm parameters.
Although liquidity mining eliminates bias, it is imperative to remember that providing tokens to liquidity providers does not remove token distribution disparity. The premise of token distribution remains the same: the bigger the investment, the higher the return.
2. Open Governance
Given that everyone can partake in liquidity mining regardless of their stake, anyone can also acquire governance tokens and hence vote on project development proposals and other important decisions taken by stakeholders. As a result, a more inclusive paradigm arises, in which even tiny investors can contribute to the growth of a marketplace.
3. Benefiting DeFi
As participation in liquidity mining is compensated, the DEX’s native token can benefit hugely from the cash inflow into the protocol. Developers and their DeFi innovators are becoming incredibly interested in this engagement strategy.
Traditionally, start-ups were limited to funding their projects, but community incentivization offers an unusual alternative to establish traction. More participants will join, and the space will grow as long as the benefits make sense and the protocols give more than sufficient security.
The Bottom Line
The blockchain industry is still emerging, and it remains to be identified whether liquidity mining will prove to be successful over the long term crypto investment strategy. You should be keen to put your money in liquidity pools if you have a solid understanding of liquidity mining and its inherent risks and rewards. High yields that bolster your portfolio and allow you to earn continuous passive income are possible with the ideal method. While other passive investment strategies may have advantages, liquidity mining is relatively easy to implement.