The cryptocurrency market is in continuous growth. Bitcoin and altcoins are increasing in value, following a general bullish momentum in the markets. Trading platforms such as Bitlevex and Binance are seeing their popularity increase as people are looking to take part in this financial revolution and trade cryptos for profit.
That said, one of the major catalysts of the bull run has been the exponential expansion of the DeFi market. This financial ecosystem is providing an increasing variety of decentralized investment products for individuals to make active and passive income.
Today, you can lend, stake, and provide cryptocurrency liquidity to make passive income using these peer-to-peer platforms. In this article, we take a closer look at liquidity mining, a financial product offered by decentralized exchanges and lending platforms. Additionally, we will provide you with a list of some of the best platforms that offer this service. Let’s delve in.
What is liquidity mining?
Liquidity mining is a financial product that is offered to users that provide liquidity to decentralized exchanges and lending platforms. In a nutshell, users lock funds in liquidity pools and provide liquidity for the exchanges to function.
When a user requests a swap on these exchanges, the swap is executed with the liquidity present in the corresponding pool. The platform then charges the user a trading fee and distributes it to the liquidity providers.
As an additional incentive, the exchange platform creates new tokens (LP tokens) and distributes them to the providers. The process is called liquidity mining because the liquidity providers are able to acquire newly minted tokens by offering their service. Finally, these newly received tokens can also be locked in liquidity pools, providing even more incentives and sources of income.
Staking vs Yield farming vs Liquidity mining
It’s no wonder why many people confuse the terms staking, yield farming, and liquidity mining, as the processes are quite similar. Here are the differences with liquidity mining:
- Staking involves locking the native tokens of the network to secure its blockchain and provide validators leverage for consensus.
- Yield farming involves providing liquidity to a DEX platform and receiving a portion of the transaction fees for the service.
- Liquidity mining is similar to yield farming with the addition of proprietary tokens as an additional incentive to the transaction fees.
Top 3 Liquidity mining protocols for 2022
Below are three of the best platforms available for liquidity mining, considering their growth and different functionalities and earning methods they provide.
Uniswap is arguably the largest decentralized exchange available on the market. It allows users to swap between thousands of ERC-20 tokens created on Ethereum and provides users with hundreds of different liquidity pools.
The Uniswap exchange was created in 2018 but saw its popularity skyrocket in 2020. This is when the UNI tokens were released to the public and the protocol decided to airdrop 400 UNI to all previous users of its platform.
This event accelerated the adoption of the exchange, as for some, this airdrop was a life-changing amount of money. Today, 400 UNI are worth around $10.000, a considerable amount for a free airdrop!
On Uniswap, users can lock funds in hundreds of different pools and receive UNI tokens for their effort.
SushiSwap is a controversial decentralized exchange that was the victim of a rug pull initiated by its creator, the mysterious Chef Nomi. However, the platform has since gotten back on its feet and the stolen funds were returned by Nomi.
The main advantage of the Sushi platform is that, unlike other decentralized swaps, it includes multiple blockchains. Users can swap between multiple latter 1 solutions such as Ethereum, Avalanche, Binance Smart Chain, and many more.
Moreover, the platform includes much more than just a simple DEX. Additional features include a staking platform, lending and borrowing through smart contracts, and a launchpad for promising projects.
Users receive SUSHI tokens when locking their funds in LPs.
PancakeSwap is a decentralized exchange that runs on the Binance Smart Chain (BCS). Consequently, it benefits from the advantages of this fast blockchain, providing extremely low transaction fees and fast swaps.
Thanks to these features, the popularity of this exchange today rivals that of Uniswap, with millions of active users. The caveat with Pancakeswap is that users are limited to swapping cryptocurrencies issued on the BSC.
The LP token that users receive for providing liquidity is the CAKE cryptocurrency, a top 50 cryptocurrency by market cap.
The DeFi space is continuously providing users with new and original ways to earn passive income. And liquidity mining is one of the most profitable passive income ventures at the moment. If you keep track of the best liquidity pools, you can start making some serious profits with this method. Just keep in mind that this method remains risky, as while your tokens remain locked in the pools, their value could drop significantly and cause you to register the impermanent loss.