DeFi (Decentralized Finance) liquidity mining is a mechanism that allows individuals to earn rewards by providing liquidity to decentralized platforms or protocols. It creates an ecosystem where users can earn passive income by contributing their cryptocurrency assets.
Liquidity Mining vs Yield Farming
Many people have heard of “DeFi yield farming” before and wonder if this is the same as liquidity mining. They are related concepts, but there are also clear differences.
In liquidity mining, the DeFi participant receives yield by providing liquidity. This yield can come from any source including (but not limited to) swap fees or governance tokens. Liquidity mining typically happens on a DEX.
A DeFi participant is yield farming when they receive yield from any type of passive source. This could be liquidity mining, staking (e.g. ETH on Lido), lending, or even borrowing.
With this in mind, you can consider liquidity mining as a type of yield farming, whereas yield farming represents any sort of income made passively by participating in DeFi activities.
Learn more about key DeFi concepts with our YouTube channel
How DeFi Liquidity Mining Works
Liquidity Provision: Users provide their cryptocurrency assets to a liquidity pool on a decentralized exchange or lending platform. DeFi projects use these pools to facilitate trading or borrowing activities within the protocol.
Token Incentives: Projects offer their native tokens as incentives to attract liquidity providers. Farmers earn these tokens in addition to any trading fees or interest the liquidity pool generates.
LP Tokens: Once a farmer deposits assets into the liquidity pool, they receive “LP tokens” in return. These tokens represent their stake in the pool and allow the protocol to track the farmer’s contribution.
Staking LP Tokens: Users can then take these LP tokens and “stake” them in a specific protocol or smart contract. By staking their LP tokens, they become eligible to receive additional rewards in the form of project tokens. The protocol distributes rewards proportionally based on the user’s stake in the pool.
Swap Fees: Some protocols charge a fee to all users using their platform to swap. For example, on Uniswap there is a 0.3% fee for swapping tokens charged to any user. Liquidity providers split this fee in proportion to their contribution to liquidity reserves.
Reward Distribution: The distribution of rewards varies depending on the protocol. Some projects distribute rewards continuously, while others have predetermined time frames or other conditions for reward allocation.
Liquidity mining incentivizes users to provide liquidity to DeFi protocols, which helps bootstrap these protocols by ensuring there is sufficient liquidity for trading and lending activities. It also allows users to earn additional income on top of their regular trading or lending returns.
Staying Safe While Liquidity Mining
It’s important to note that DeFi liquidity mining involves risks, such as impermanent loss (a temporary loss of value compared to simply holding the assets), smart contract vulnerabilities, and potential market volatility. Therefore, it’s crucial for participants to carefully assess the risks and conduct thorough research before engaging in liquidity mining activities.
To ensure you don’t interact with malicious projects, we offer our free smart contract audit tool, Scanner. Enter a project name, token name, NFT address, or contract address to perform a comprehensive security analysis in just a few seconds. Scanner is an ultimate web3 antivirus tool that runs 100+ audit factors.
For projects interested in ensuring their security, contact us regarding smart contract auditing services. Our goal is to provide professional services that make the world of DeFi safer for users.
You can view data regarding the biggest crypto hacks & scams in history via our REKT Database. We also offer several tools to allow DeFi yield farmers to protect their portfolio when exploring web3 opportunities. Our Shield tool lets you monitor and revoke wallet permissions from malicious tokens or contracts.
What Are the Costs of Liquidity Mining?
Beyond the risk of impermanent loss, you should be aware of the “gas” you will need to pay to participate in liquidity mining protocols. Web3 blockchain networks are open computers that anyone can use. However, the network must require fees to ensure malicious users do not spam the network. This is generally referred to as “gas”. On any blockchain, users pay gas fees that correlate with the computational task they are trying to complete.
For popular chains, like Ethereum, these fees can vary anywhere from a few dollars to hundreds of dollars depending on the current state of the network. Less popular networks will have lower fees, but may not have as many opportunities as more popular networks. If you are planning on liquidity mining, be diligent about factoring gas into your profit/loss calculations.
Popular DeFi Liquidity Mining Platforms
There are several popular platforms and apps for DeFi liquidity mining. Here are a few examples:
Uniswap is a decentralized exchange (DEX) built across multiple EVM chains including Ethereum, Polygon, Optimism, Arbitrum, Celo, and BNB Smart Chain. It allows users to swap tokens and provides liquidity mechanisms where users can contribute their assets and earn trading fees. The platform is run by the Uniswap Foundation and decentralized governance is executed via the votes of holders of the UNI token.
View Uniswap Opportunities
Sushi is another decentralized exchange protocol based on code originally forked from Uniswap. It offers similar functionality to Uniswap but with additional features and rewards. It also operates on Ethereum and over 20 different EVM chains. Users can provide liquidity to Sushi pools and earn SUSHI protocol governance tokens as rewards
View SushiSwap Opportunities
PancakeSwap is a decentralized exchange (DEX) and automated market maker (AMM) that operates on BNB Smart Chain, Ethereum, Polygon zkEVM, and Aptos. Similar to Uniswap, it allows users to swap tokens and provides liquidity pools where users can contribute their assets and earn trading fees. Rewards are paid in the protocols governance token, CAKE.
View PancakeSwap Opportunities
Balancer is an automated portfolio manager, liquidity provider, and price sensor. Its unique feature is that it generalizes the concept of an automated market maker (AMM) by allowing multiple tokens in a liquidity pool with custom weights. The protocol operates on Ethereum, Gnosis Chain, Polygon, Polygon zkEVM, and Arbitrum. It is governed by the BAL token.
View Balancer Opportunities
Curve is a DEX optimized for stablecoin trading with low slippage. Users can provide liquidity to Curve pools and earn trading fees as well as CRV tokens. It operates on Ethereum, Avalanche, Arbitrum, BNBChain, Fantom, Harmony, Optimism, Polygon, and Gnosis Chain. It is governed by the CRV token.
View Curve Opportunities
These are just a few examples, and the DeFi space is continually evolving with new platforms and apps emerging. It’s important to conduct thorough research, read community discussions, and exercise caution when using these platforms, as they may carry certain risks. Additionally, always make sure to use trusted and audited platforms and exercise proper security measures to protect your funds.
How to Find Liquidity Mining Opportunities
If you are looking to find new liquidity mining opportunities, we recommend sorting our Explore DeFi farming data tool by APR. New protocols generally offer the highest APRs as a method to boost their TVL. However, please note that we recommend doing your own research on ALL liquidity mining farms that you interact with. The newer the protocol, the higher the risk that there may be an unknown vulnerability.
You can also stay up-to-date on the best DeFi liquidity mining platform opportunities by following our accounts on Twitter and YouTube. In addition to monitoring the best new DeFi protocols, we help beginner crypto participants by tracking upcoming crypto airdrops.