DeFi is a term for decentralized banking, which is becoming more popular. Investors use them to diversify their portfolios and make passive income. On DeFi, liquidity mining is one of the most popular ways to make money.
What does it do?
The process of Liquidity Mining by which users give tokens to liquidity pools on DeFi platforms in exchange for a reward is called “liquidity mining.” These tokens are used by decentralized protocols to process deals, and users are rewarded based on how much they put in. During the trade process, the proportion of assets in the pool changes, and as a result, so does the price of those assets.
On DeFi platforms, AMM is an automatic market maker. It figures out the price of assets with the help of a mathematical formula. A trader doesn’t have to be involved in an ETH-to-MATIC exchange because users interact with a smart contract that gives liquidity to the pool. Users who donated tokens to the pool made and are in charge of this smart contract.
What are the pros and cons of liquidity mining?
There are no risk-free ways to make money that works for everyone. The possibility of achieving high profitability from holding cryptocurrency, which on some platforms can reach three-digit values, should be noted among the advantages of liquidity mining.
But it’s important to keep in mind that high returns always come with the same high risk. Another good thing about the process is that it gives buyers a chance to learn about new tokens, which may make them more valuable in the future. Liquidity mining pushes users to help DeFi protocols and the crypto market as a whole grow and improve.
But there are some disadvantages to liquidity mining that must be taken into account. Most important is the risk of temporary loss, which happens when the price of tokens that have been placed goes down. The more this change is, the more volatile loss you will have, and when you take money out, you will get less than you put in.
The process of liquidity mining is also hard to understand, which is another drawback. To make a pool, keep an eye on it, and run it, you will need to know certain things. At first, this will take a lot of time, and making money without doing anything will not be as easy as it seemed.
The top 5 sites for mining liquidity
A decentralized system called Uniswap allows you to trade tokens without going through a middleman. This platform was one of the first decentralized marketplaces to get a lot of attention in the DeFi space when it came out in November 2018. AMM is used to price goods on Uniswap, which is built on the Ethereum blockchain.
There are two tokens in each Uniswap liquidity pool. These pools keep track of liquidity providers’ pricing tactics and total reserves. After each trade, the reserves and prices are changed immediately.
In order to enhance the original Uniswap model by adding new features, SushiSwap was formed as a result. This platform is a fork of Uniswap, but it has a control token and rewards for liquidity providers. There is also now the option to lend money and invest in crypto farming.
Curve is a decentralized market where only stablecoins are traded. This allows you to create trading pairs with greater stability and lowers the risk of price changes. Here, you can’t just change SAND to MATIC, but you can use LetsExchange for this kind of thing. The anchoring curve, which allows you to make transactions that are more efficient and have less slippage, is the unique algorithm of the platform. In the form of CRV tokens, liquidity providers on Curve are rewarded.
A balancer is a protocol and a decentralized portfolio manager that allows users to trade and create their own baskets of tokens without being controlled from a central location. In order to give traders and liquidity providers more freedom and customization, it was launched in March 2020. Balancer uses an automated market maker to set prices for tokens and allows you to create your own liquidity pools.
1inch is a broker for multiple decentralized exchanges that helps users find the best prices to trade across all of them. It was launched in 2019 and quickly became one of the most famous DeFi solutions. On the platform, liquidity providers are rewarded with 1INCH tokens.
As a result, liquidity mining allows investors to earn cryptocurrency quietly and earn a high income that is much higher than the interest on deposits. But there are risks to think about when giving tokens to a pool that comes with this tool. Any action that has to do with coins comes with a high risk. Don’t forget to check the platform and read the terms of service.