What is Liquidity Mining? Definition and Meaning

In the wake of blockchain adoption, many liquidity mining investments occur on newer exchanges. One benefit of liquidity mining that is sometimes overlooked is that it builds a trustworthy and dedicated community. When a liquidity mining system is implemented, liquidity providers frequently become more active in the community while the exchange expands. Individuals who provide liquidity are more likely to use the system and maintain tokens after investing in digital assets. The benefits of liquidity mining extend beyond the money earned as a liquidity provider.

what is liquidity mining

Click on the “pool” button and then the “new position” link, select the Uniswap trading pair you want, and see how the rewards work out. Ethereum and Tether are one of the most popular pairings on Uniswap, so we’re going with those options. Again, the liquidity provided to Uniswap will be granted to clients who trade assets from the ETH/USDT (or any other) liquidity pool. Balancer is another Ethereum-focused decentralized exchange giving UniSwap a run for its money. It is arguably the best alternative to UniSwap out there, offering better terms for both liquidity providers and traders alike. Because of the volatility of cryptocurrency, you would want an investment method that earns higher interest than you are likely to get from liquidity pools.

What Is Liquidity in Stocks?

Liquidity mining is about providing your crypto tokens to decentralized exchanges (or DeFi platforms), so they will have better liquidity, and you will receive a specified annual yield (APY) as a reward. The tokens you hold on a decentralized exchange feed the platform’s liquidity, allowing anonymous traders to exchange coins. These incentives can take the form of getting a proportion of each trader’s fees or incentives in the form of tokens (usually native tokens). As most ecosystems provide their communities with a governance model, additional benefits such as voting rights can further incentivize liquidity mining. These voting rights allow further decentralization by distributing the power among the token holders to make key decisions regarding the protocol.

  • Liquidity mining or liquidity mining is a characteristic and strategy of some decentralized finance protocols (DeFi) with which they seek to attract users.
  • Liquidity pools are fed by the coins provided by investors in exchange for an annual reward.
  • Given the growing number of DeFi platforms and tokens, there is an increased array of options for liquidity mining.
  • Liquidity mining is an investment strategy that allows users to contribute or pool crypto funds within a DeFi protocol or smart contract.
  • People started to try other profitable ways of earning through DeFi platforms.
  • The liquidity providers in AMM-based exchanges make money by accumulating LP (liquidity pool) rewards.

Liquidity pools operate by keeping the value derived from multiplying the value of both assets constant. You can think of it as a reservoir of funds that allows for decentralized, peer-to-peer trading without the need for a centralized intermediary. Liquidity pools have the feature of instant liquidation if the participants prefer; the funds are converted into spendable or withdrawable cash.

Learn and Earn Crypto Programs: A Comprehensive Guide

Decentralized exchanges and other DeFi platforms embody the initial strive of cryptocurrencies to create an alternative borderless financial system free of middlemen and external control. Decentralized exchanges are crucial for traders that don’t want to share their data with third parties. It can be helpful for the residents of the countries that are not provided the service on most platforms and for other groups of traders. Centralized exchanges usually charge higher fees and restrain users due to different policies. Blockchain market is a magnet for hackers willing to capitalize on cryptocurrency platforms.

what is liquidity mining

Please read the full article to learn everything you need to know about liquidity mining. As the cryptocurrency and decentralized finance (DeFi) sectors continue to expand in 2023, liquidity mining has become an increasingly important topic that traders and investors are keen to understand. Whether you’re a seasoned trader or new to the crypto scene, gaining insights into liquidity mining could be instrumental in shaping your investment strategy in this ever-changing financial ecosystem.

DeFi Glossary: Learning the Slang

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. Prior to the emergence of decentralized finance (DeFi), owners of cryptocurrencies could only either hold or trade them to generate profits from their assets. However, the emergence of DeFi liquidity mining has been something of a game changer.

Of course, as with any investment, there are also risks involved in liquidity mining, and investors must carefully consider their own financial goals and risk tolerance before diving in. Nonetheless, for those willing to take on the risks, liquidity mining in 2023 could offer a promising return on investment. The entire liquidity pool earns rewards for providing that liquidity and your rewards are proportional to your contribution. So, if your crypto accounts for 1% of all the crypto in the liquidity pool, you would earn 1% of the pool’s rewards. A cryptocurrency liquidity pool is the pool of cryptocurrencies that a decentralized exchange uses for its liquidity.

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Liquidity mining is one of the many ways you can earn passive income while putting your idle crypto assets to work. Liquidity is crucial when it comes to investing and trading cryptocurrencies. Liquidity pools are what is liquidity mining essentially pools of tokens locked in smart contracts on decentralized exchanges. Users can trade cryptocurrencies using these pools at market-determined prices, facilitating high-liquidity cryptocurrency trading.

However, we usually talk about liquidity mining when a DeFi protocol activates a functionality that allows its users to receive rewards for the fact of depositing and blocking capital on their platform. Liquidity mining or liquidity mining is a characteristic and strategy of some decentralized finance protocols (DeFi) with which they seek to attract users. AMMs solved the liquidity problem by building liquidity pools and incentivizing liquidity providers to fill these pools with assets, entirely without the use of third-party intermediaries. The more assets a pool has, and the more liquidity it has, the easier it becomes to trade on decentralized exchanges. We already looked at Uniswap, which is a market-leading DEX running on any blockchain network that can process Ethereum-compatible smart contracts. This sophisticated system was among the first decentralized exchanges, and many rivals started out as clones of Uniswap’s open-source code.


For instance, Uniswap — a popular De-Fi exchange — charges a 0.3% fee for swapping tokens. This fee is split between the liquidity providers based on their contribution to liquidity reserves. As far as the liquidity pools are concerned, each of them has its own distinctive features and rewards criteria. Liquidity mining is necessary because a DEX needs liquidity to allow trading between different token pairs. Using this investment strategy, users can then provide liquidity to facilitate these transactions. This also means that the vast majority of liquidity pools are between trading pairs, with users depositing one of two cryptocurrencies depending on the pool.

what is liquidity mining

Aave also has its own governance token, AAVE, which was preceded by another native token called LEND that was abandoned after a migration. Liquidity mining comes in really handy when attracting press coverage and raising greater awareness of the product. However, the entire campaign needs to be carefully managed to ensure that the liquidity mining budget isn’t spent on just this one goal.

Why liquidity mining is important

Participants were awarded IDEX tokens instead of locking funds in a separate pool once they decided to offer liquidity. Finding the right balance between risk and reward can be difficult, given the large number of liquidity mining options. There will likely be some trial and error involved in your first liquidity mining investments. Cryptocurrencies are inherently volatile and you should be prepared for big price swings on a daily basis. Your life savings probably don’t belong in a high-yield liquidity mining account. You can pick one of several reward tiers tied to different interest rates charged to traders who actually make use of the digital funds you’re providing.

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