What Is Liquidity Mining?

Apr 22, 2022

So, you feel like you’re ready to climb up the upper echelon of crypto investing and enter the high-risk but high-reward world of Liquidity Mining. Congratulations! By reading this article, you’re already one step closer to advancing both your merits and portfolio as we cover the “ins and outs” of this highly-disruptive Decentralized Finance (DeFi) product.

Let’s begin!

KEY TAKEAWAYS

  • Definition of Liquidity Mining
  • How Does Liquidity Mining Work & How Do I Participate?
  • What are the Advantages and Disadvantages of Liquidity Mining?

Definition Of Liquidity Mining

With Liquidity Mining being a complex and technical subject, the best approach to having a good sense of its actual definition and process is by touching on a subject that most of us are already familiar with: Traditional Finance.

In Traditional Finance, market makers such as brokerage houses or firms provide trading services for investors in an effort to keep financial markets liquid. These market makers take on the risk of holding assets to provide liquidity to the market - which is why they are compensated while also earning a profit through the spread between the asset bid and offer price.

In DeFi, Liquidity Miners have the same function as market makers in that they provide liquidity in Decentralized Exchanges (DEXs).

What are DEXs and why do they need liquidity?

A DEX is a blockchain-based marketplace where peer-to-peer crypto transactions take place without the need for an intermediary. Unlike Centralized Crypto Exchanges, DEXs do not have record books - which is why Liquidity Miners supply cryptocurrencies (normally in pairs) in liquidity mining pools to enable trades and allow for transactions to take place. By doing so, Liquidity Miners are compensated with fees and Liquidity Mining rewards (usually in the form of cryptocurrencies) based on their share of the total pool liquidity.

So, what is Liquidity Mining? It is, simply, a blockchain-based investment mechanism that allows crypto investors to participate as Liquidity Miners and generate passive income or cash flow as they receive Liquidity Mining rewards and fees.

How Does Liquidity Mining Work & How Do I Participate?

Putting aside the technicalities of how Liquidity Mining pools are created and other complex or miscellaneous information, participating in Liquidity Mining is actually just a simple process. There are, however, two things to always keep in mind: 1) Liquidity Mining pools normally consist of crypto trading pairs (e.g., BTC - DFI) and 2) These pairs have a ratio that needs to be maintained and balanced (e.g., 1 BTC = 1,000 DFI)

Why is it important to keep these two things in mind? It’s because these two things determine what crypto pairs you need to have in order to participate in Liquidity Mining, and also how many of each pair you need to deposit into the Liquidity Mining pool based on the initially set ratio.

Still sounds complicated? No problem. By using Cake DeFi’s Liquidity Mining service, you don’t have to worry about the complexities that come along with Liquidity Mining and just focus on reaping the benefits and rewards of putting your cryptos to work.

How? Simply go to our Liquidity Mining page and choose from the wide variety of liquidity mining pools available. What makes our service unique? We’ve included details such as APR, Primary Token Price and Total Liquidity for transparency and which should prove to be useful when deciding on which Liquidity Mining pool to deposit crypto pairs in.

In addition, our platform also allows participants to easily determine how many of each pair are required and your potential returns based on the DEX-market price stability.

What are the Advantages and Disadvantages of Liquidity Mining?

Similar to other DeFi products and services, Liquidity Mining has a relatively low barrier to entry. Anyone, anywhere at any time can participate in Liquidity Mining and reap the benefits thereof.

Liquidity Mining also offers the potential for high yield rewards - which is, indeed, the case with the service that we offer. In fact, at the time of writing, Cake DeFi users can potentially benefit from a highly competitive APR which can go as high as 80.11%. Furthermore, our platform is highly secure and transparent.

That said, Liquidity Mining is more suited for crypto investors that have high risk tolerance as there are many risks associated with it - one of which is Impermanent Loss. What is it?  It basically describes the temporary loss of funds which can potentially be experienced by Liquidity Miners due to volatility in a crypto trading pair.

For more information on Impermanent Loss, you may watch this video by Cake DeFi CEO & Co-Founder Julian Hosp.

All things considered, Liquidity Mining is still a better option than just HODLing and hoping that your crypto assets increase in value so you can sell them for profit once they do. Why? Because with Liquidity Mining, the potential returns are high and are almost guaranteed - which, in many ways, negate the risks involved.

If you want to know more about Liquidity Mining or other ways of making money with your cryptocurrencies, you may read this article or check our blog section for other useful information on the subject.

If you want to use our Liquidity Mining service but are not yet a registered Cake DeFi user, you may click here to sign up and start generating passive income with us. You will get US$30 worth of DFI tokens when you register successfully and make a deposit of US$50 or more, and allocate the amount for at least 28 days into either our Lending, Staking Freezer or Liquidity Mining Freezer service.

And that’s it! Thank you for reading this article. We look forward to seeing you “bake” passive income and generate cash flow with us soon!

Cake DeFi

The most transparent way to get cashflow from your cryptocurrencies.

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