What Is Liquidity Mining And Where To Mine It?

What is liquidity mining?

Blockchain technology and cryptocurrency have seen rapid growth in the last few years, making it easier to earn passive income through the decentralized finance sector. By leveraging this sector with a liquidity mining strategy, investors can earn regular passive income by using their cryptocurrencies to provide liquidity to decentralized exchanges. Many investors use this to earn an annual yield on their holdings by decentralizing trading exchanges and using their cryptocurrency as a source of liquidity. 

In other words, in cryptocurrency liquidity mining, one earns rewards by letting a trading service that is decentralized work with some of the cryptocurrency tokens one owns. These tokens are to facilitate low-friction trades among anonymous crypto holders. 

How does liquidity mining work?

For liquidity mining to work, one first needs to own cryptocurrencies. In most cases, the coins one uses for liquidity mining can not be held in one’s crypto trading service’s standard wallet but rather must be transferred to a self-custody wallet where one has direct control over the assets.  For liquidity mining to work, one needs to participate in the liquidity pools, which is very simple. All it involves is the deposition of assets in a common pool, which is known as a liquidity pool. This process is similar to how one sends cryptocurrencies from one wallet to another.

A liquidity pool usually consists of a trading pair, and as a liquidity miner, one can opt to deposit either of the assets into the pool. By depositing one’s asset on the Defi platforms, the liquidity pool makes it simpler for traders to come and go out of positions, with the trading fees partly used to reward them. The more an investor contributes to a liquidity pool, the larger the shares will be of the reward they are going to receive. While different platforms have different implementations, these are the basic workings of liquidity mining.

Best places to perform liquidity mining

Liquidity mining is the strategy to go for, even if you want to start investing with a small amount and get good returns. The top five places to perform liquidity mining are as follows:

• UniSwap
• Balancer
• PancakeSwap
• SushiSwap
• Curve

1. UniSwap DEX

UniSwap is the most popular and largest decentralized crypto exchange, with a massive trading volume. The UniSwap platform has the logo of the face of a unicorn in black and white. The site only supports Ethereum and ERC-20 tokens, which means that to invest in liquidity, the investor needs to use the supported Ethereum wallet while depositing Ether into a liquidity pool of their choice. This platform offers a governance token known as UNI to its liquidity providers, which can be used for voting on different issues as well as claiming ownership of the UNI community treasury, the protocol fee switch, SOCKS liquidity tokens, and the UniSwap default list.

2. Balancer DEX

Like UniSwap, Balancer also focuses on Ethereum as a decentralized exchange-giving platform. It can be argued to be the best alternative to UniSwap that is out there, as it offers better terms for liquidity providers as well as traders dealing in liquidity. With this platform, liquidity pools do not remain limited to two tokens, as they can support up to eight multiple tokens within a singular pool. It is also more versatile, with an interactive user interface, than UniSwap. The Balancer has a three-layer circular pyramid in black as its logo, which seems like three plates being balanced atop each other.

3. PancakeSwap DEX

Based on the recent Binance Smart Chain, PancakeSwap gives traders and providers of liquidity access to BEP-20 tokens which is not given by UniSwap or Balancer. The platform gives fast services with low transaction fees as compared to its competitors and is a better option too as its liquidity pools offer higher returns. The blockchain used by the site is also eco-friendly as it uses the Proof of Staked Authority mechanism and can be accessed through the famous MetaMask Ethereum wallet as well. 

4. SushiSwap DEX

The SushiSwap DEX platform is similar to the UniSwap platform with the difference being that it has additional features. The team at SushiSwap aims to give its consumers a wide range of financial services in the future which includes stock trading. Right now the site offers liquidity mining yields which can be compared to UniSwap which accounts for its credibility. The platform also offers a large catalog of token pairings to choose from for liquidity providers and investors.

5. Curve DEX

The Curve DEX is a unique platform that has a liquidity pool based on stablecoins entirely. The annual yields in the platform are measured in a single-digit percentage but this platform is less volatile than other UniSwap alternatives. It was launched in 2020 and had the goal of providing a cost-effective exchange of stablecoins.