One feature and marketing tactic used by several decentralised financial protocols (DeFi) to draw customers is liquidity mining. This concentrates on empowering the infusion of liquidity into the system in return for dispersing between customers a set of tokens that grant access to the project’s administration and that can also be traded for higher rewards or other incentives. If you are a trader, Immediate Edge is essential trading platform because it can help you in trade bitcoin easily.
Yield Farming Vs. Liquidity Mining
In opposition to this, yield farming and liquidity mining are closely connected. A method known as “yield farming” aims to make money by investing in several platforms and utilising diverse market factors. However, when a DeFi protocol initiates a feature that enables its users to get paid for adding and blocking money to its system, that is when we often refer to liquidity mining. Typically, governance tokens are obtained as payment for the benefits.
Depending on the system, these tokens could or might not have voting power. Additionally, they frequently provide holders with access to interest or prizes that are given regularly. In this method, they increase their profits as more money is blocked on the network, more tokens are received, and more incentives are earned. Because liquidity is being injected, the phrase “liquidity mining” was coined. Investors’ infusion of money enables users to “mine” governance tokens, which are then distributed to system participants. It is again strongly tied to the idea of staking and the platform’s mining mechanism.
Perks Of Liquidity Mining
In addition to the liquidity providers, DeFi platforms, and the larger blockchain community all stand to gain greatly from liquidity mining.
This only applies to DeFi protocols that give governance tokens to liquidity providers, it does not apply to other DeFi protocols. Liquidity providers (LPs) are typically compensated by the percentage of their contributions to the liquidity pool with most platforms. Greater token rewards are given to Liquidity Providers in proportion to the increased risk they are taking. Uses for governance tokens include:
- Vote on the plans for development
- Vote on important protocol modifications, including those that affect the user experience and other things
- Regardless of the equitable distribution of governance tokens, this platform still seems to be vulnerable to inequity since a small number of powerful investors might take over the governance function.
Liquidity mining is a great way for LPs to generate passive revenue, just like passive investors do in staking systems.
Liquidity protocols have a win-win-win result, this type of engagement benefits all stakeholders in a DeFi economy. The platform benefits from a robust user community that ranges from LPs as well as traders to developers and other third-party service providers, and from the LPs receiving compensation for lending their tokens to the brokers enjoying an effective and highly dynamic market.
It is simple for small investors to join in liquidity mining since most platforms allow for the deposit of modest sums, and investors may reinvest their returns to raise their shares inside the liquidity pools.
Since anybody may partake in liquidity mining regardless of the stake they own, anybody can equally acquire the governance tokens and, as a result, cast a vote on project-related development plans and other important choices made by the stakeholders. This results in a strategy that is more open and allows even small investors to participate in the growth of a market.
There are numerous reasons why liquidity mining is becoming more liked amongst the people. For instance, it provides a wonderful way to generate additional income, it helps to decentralise the blockchain market, and it gives investors a choice regarding what to do with the reserve currencies.