Liquidity Mining Basics & Must-Knows
Nothing feels good like having your money work for you while you chill in a beach house, sipping on ice-cold coladas. We’re talking boss moves here.
Today, DeFi provides you with myriads of opportunities to invest and earn massive income. One of those opportunities is yield farming. There’s no doubt because yield farming is one of the best ways to earn passive income in the crypto industry.
<text-h2>How Yield Farming Works<text-h2>
First, you add funds to a liquidity pool. Usually these pools provide liquidity to a DEX platform. You become an LP (liquidity provider) once the funds have been added to the pool. There are hundreds of token and coin pairs currently being locked in DeFi platforms, with the list growing by the minute.
The LP then receives rewards for locking funds in the pool. The rewards are usually based on the amount of funds locked in. In general, the more funds locked, the higher the rewards.
These rewards come from swap fees and mining generated from the DeFi platform. You can further choose to deposit your rewards in a liquidity pool to generate more rewards, essentially compounding your returns. LPs often move their funds around different pools to generate higher overall yields by using various forms of mechanisms which includes liquidity mining.
<text-h2>Liquidity mining vs Yield farming<text-h2>
Liquidity mining is only a subset of yield farming. It involves you lending liquidity pairs to a particular pool and receiving a reward based on the amount of liquidity you provided to the pool. Yield farming on the other hand, is the overall concept. Here, you move your liquidity around different DeFi platforms using different mechanisms like leveraged yield farming, single or multi asset yield and liquidity mining. All of these make up yield farming.
<text-h2>Some tips to keep you on top of the game<text-h2>
<text-h3>DYOR: Do Your Own Research<text-h3>
Do not just lock in your crypto blindly in any pool. Insanely high APYs can seem attractive at first sight, only to hit you with huge dips in rewards after you enter the pool. DeFi APYs are volatile, my friend. Take your time to learn about the dynamic strategies in yield farming, the different DeFi protocols, pools and risks involved.
<text-h3>Choose platforms that suit your comfort level<text-h3>
Seek out platforms you can easily understand and navigate to make the yield farming process easier for you. You gotta understand the different chains that yield farming is built on (e.g. Ethereum vs Binance Smart Chain vs Ontology). Also, be able to use the different types of wallets (Metamask, Trust Wallet, WalletConnect, etc) and know what the total fees are before you jump in.
<text-h3>Consider the risks<text-h3>
With high earnings, comes high risk! DeFi protocols are typically built on smart contracts and can be prone to bugs and hacks. You could lose all of your funds at any point of failure. It’s important that you consider this well before becoming an LP. Good practice is to check if the DeFi platform’s smart contract code has been fully audited by reputable companies, and make sure they are not just an alpha product with zero audits.
Yield farming provides a means of passive income for crypto holders. You can potentially earn more than you would have by just holding your crypto assets, if you avoid the common pitfalls. Let your investments do the talking, but be smart with it.