In the past couple of years, we have witnessed rapid growth in decentralized finance (DeFi). There are several methods for investors to produce cash flow using cryptocurrencies and fiat currency, and liquidity mining is one of the most popular.
Until recently, cryptocurrencies were only exchanged on a centralized exchange (CEX). Nevertheless, smart contracts have given birth to fully automated and independent decentralized exchanges (DEX), requiring new protocols for their proliferation.
Numerous sectors of the financial industry are affected by digitalization. Increasingly, new decentralized investment solutions are being introduced. Typically, the total automation of these protocols makes them less expensive and more secure than traditional applications.
The rise of defi
One factor for the increased demand is the potential for big profits. In contrast, traditional forms of investing may not create significant profits because of low-interest rates. Meanwhile, protocols in the DeFi industry often give yearly returns in the double digits. Moreover, investors might benefit from a token(s) valuation increase.
Capital lending and borrowing represent the DeFi market’s most significant share. Using smart contracts, the procedure is entirely automated. This implies that there is no need for a middleman, and the computer code provides the foundation for confidence.
In addition, decentralized finance encompasses the trading of cryptocurrencies on decentralized exchanges or marketplaces (DEX.)These vary from central exchanges (CEX) in that they are not operated and managed by a firm. Instead, a network of smart contracts allows automated transactions.
Liquidity mining offers numerous possibilities
Liquidity mining is a decentralized financial method in which players contribute some of their crypto assets to multiple liquidity pools in exchange for tokens and fees.
Liquidity mining has proved immensely popular among investors since it generates passive income, meaning that users may profit from cryptocurrency liquidity mining without making active investing choices. Users’ overall benefits are determined by their participation in a liquidity pool.
Even though cryptocurrency liquidity mining became much more prevalent in June 2020, the approach was pioneered three years before. IDEX, one of the most prominent decentralized exchanges, first introduced the idea in 2017. Synthetix and Compound further developed the concept over the following three years.
When the IDEX exchange introduced the DeFi liquidity mining feature, it did so under the pretext of a reward program that offered specific incentives to the exchange’s members. Participants were issued IDEX tokens after they decided to offer liquidity rather than locking funds in a separate pool. The only thing players had to do to get IDEX was to fill out a simple limit order.
When Compound unveiled the DeFi liquidity mining idea in 2020, it was quickly accepted. Instead of storing crypto assets, which do not generate any returns, liquidity mining allows users to earn passive income on their current holdings. Total value (TVL) in liquidity mining has hovered at $75 billion, a big draw for exchange participants since it’s open to everyone.
Trading on decentralized exchanges via Automated Market Maker (AMM) is becoming a staple for passive income generation. However, a precondition for this is often a fundamental grasp of the application’s features and correct use. Even though many systems are currently regarded as safe and are rigorously vetted, user error might result in losses.
Security cannot be guaranteed even by the apps themselves. Users are exclusively responsible for their wallet’s holdings, and an exchange cannot be held accountable if the user’s access credentials are lost. As a result, a thorough study should precede the selection of a DEX, and tiny test transactions should be conducted to ensure the DEX’s functionality.