What is liquidity mining?

Liquidity Mining is a term used in a Defi ecosystem. Liquidity Mining refers to the procedure of depositing or lending delegated assets with a mining technique to provide liquidity for the product's fund pool, and it usually occurs in the sense that the Liquidity Providers get an income for their services.

Normal, the Liquidity Providers do earn a reward with the project's native token or other tokens depending on the project protocol.

Why Liquidity Mining?

The core function of Liquidity Mining is to improve the liquidity of the project. In a nutshell, liquidity of funds is paramount to all Defi projects because the DeFi space does not have any self-built capital pool that could stabilize the liquidity. Defi is a decentralized ecosystem and it requires a decentralized fund pool model to maintain its liquidity; this brought the idea of Liquidity Mining. Notwithstanding, stabilizing the Liquidity of Defi projects is always an issue of concerns.

So liquidity mining is really a new opportunity of earning money in the crypto industry. Liquidity Mining is an avenue that incentives users for providing liquidity into the DeFi project.

Liquidity mining blend value budget to promote price discovery

Liquidity mining effectively links value islands in a decentralized dimension, and accelerates the frequency of value exchange, and ultimately promotes price discovery.

Price discovery is a comprehensive reflection of traders' understanding of the current market supply and demand relationship and expectations of the future market. It will not only help the reasonable allocation of resources, but also enable investors and financial institutions to make reasonable decisions based on this price.

Example of Project that Support Liquidity Mining

COMPOUND (COMP)

Compound is a Defi project based on ethereum blockchain, it is a platform working to mortgage lending. This platform rewards the Liquidity miners with their native token. In the recent research I made, more than $700 millions dollar has been locked on Compound. Those that mortgage their assets on Compound will be earning annualized income. Same time, the users can pay some corresponding interest in order to lend assets while borrowing and lending within the Compound ecosystem will also earn a certain number of governance tokens distributed by the system. There are other benefits of holding their native token (COMP); being a holder will give you the privilege to vote and to propose changes in the Compound protocol.

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Risks of liquidity mining

One of the notable risks of liquidity mining is known as "Risk of liquidation". If the Liquidity miners failed to do proper pledge rate settings, there might be an issue and all their efforts will be liquidated and probably lost all their dollars.

Conclusion

Cordially, the Liquidity providers are working with a common goal by providing liquidity for a certain exchange and token. However, they earn some rewards in return for providing liquidity for the certain token. The approach of liquidity mining is very essential and it is one of the best community-based and data-driven measures for market making. This is another avenue of making more money in the crypto industry, instead of just holding your cryptocurrency, use it to provide liquidity for a specified token and start earning reward from the pool.