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Liquidity mining = Yield farming? Learn about the difference between the two



For fans of the cryptocurrency and blockchain world, 2020 is definitely the year of DeFi: Believe it or not, the number of retweets and likes around this topic has been rising in recent months. By some accounts, DeFi is but the umpteenth bubble in a still-nascent world where FOMO, the promise of high returns, and the use of phantom governance tokens are dwindling. As analyzed in some articles, DeFi is undoubtedly a large collection pool, from DEX to synthetic assets through lending platforms and asset management platforms, in the most diverse fields, we have found countless strategies, terms and projects.

In this post, we try to explain two terms that are often confused and used, Liquidity Mining and Yield Farming.

The Web3 fund ABCDE issued a proposal in the BendDAO community saying that it plans to provide liquidity of 10,000 Ethereum: on August 24, BMAN, the initiator of the developer community BeWater, and Du Jun, the co-founder of Huobi, established a $400 million Web3 fund ABCDE in BendDAO The community released a new proposal, which plans to purchase 20% of the total Token (2 billion BEND) from the BendDAO treasury, reach a strategic partnership with BendDAO and provide it with a liquidity of 10,000 ETH. In the proposal, the purchase price of 2 billion BEND is 2400ETH, and the lock-up period is 18 months.

ABCDE Capital stated: By making ABCDE a member of the BendDAO community, the proposal will help increase BendDAO ETH reserves and strengthen BendDAO's position as the market-leading NFT liquidity protocol. [2022/8/24 12:45:43]

Liquidity mining stems from two very important concepts in the cryptocurrency world, liquidity and mining. By liquidity, we mean the availability of tokens in a given platform, which is critical to the creation, growth, and expansion of DeFi markets. And mining, we refer to PoW-based technology, by providing computing power, you can get new coins that the algorithm has just minted. Although these two concepts are far apart, they can be combined with each other, which will undoubtedly benefit the vigorous development of some DeFi projects.

THORChain released the "Terra LPers Call to Action", Terra liquidity providers need to delete all liquidity before Terra fork: On May 18th, the decentralized cross-chain transaction protocol THORChain issued a "Terra LPers Call to Action", calling for Terra liquidity The sex provider removes all liquidity. Among them, THORChain version 1.89 has been released, which will allow withdrawals. Users with LUNA or UST will have time to withdraw from the liquidity pool, and are still eligible for Terra’s airdrop snapshot on May 27, but this must be done before Terra’s fork. Liquidity providers need to withdraw in time according to the instructions before THORChain clears Terra from the network. If users are late, they will not be eligible to apply for snapshots, and funds may be lost forever. In addition, if liquidity providers do not take any action, their LUNA or The rest of the UST will be returned to the relevant wallet. [2022/5/18 3:24:37]

Aave founder: Aave market liquidity has returned to the $20 billion level: Aave founder and CEO Stani Kulechov said on Twitter that the Aave market liquidity scale has returned to the $20 billion level, which is definitely a signal for the continuation of the bull market. [2021/5/31 22:59:03]

Generally speaking, people who want to participate in liquidity mining "lend" liquidity to a certain pool (for example, on Uniswap), and obtain new Tokens that have just been minted according to the time and amount of liquidity provided. Let us give an example to explain the possible doubts.

A new platform in the DeFi world has Governance Token (GOV). If it wants to distribute Tokens and in order to do this, the platform will introduce some Uniswap pools on his white paper or landing page, and then these GOVs can be "mined" from these pools through liquidity mining.

Dynamics | BitMarket was closed due to hacking and theft, and the former executives did not repair it in time, resulting in insufficient liquidity: According to cryptopolitan, Marcin Aszkielowicza, director of the Polish cryptocurrency exchange BitMarket, issued a statement saying that the exchange was hacked in 2017, resulting in investment Investors and companies lost at least 600 bitcoins. Aszkielowicza pinned the blame on former BitMarket executives, saying nothing was done to prevent the hack or address the problems it caused. Aszkielowicza said gaps in exchange vaults have been patched for the past two years to prevent liquidity issues. However, since the cryptocurrency market rallied this year, the company has failed to maintain balance, and if it is not closed in time, it will lead to rapid bankruptcy. BitMarket also stated that it is communicating with local authorities and will find out the actual cause and share information with the community. [2019/7/12]

Those who are interested in the project or who are likely to receive these GOVs must provide liquidity to the above mentioned pools.

In exchange, users will receive the Liquidity Provider Token (LP Token) required for final redemption.

As long as the Token provided by the user is still in the pool, he can simultaneously earn a 0.3% handling fee and a governance token "mined" in each block.

When redeeming, the user obtains the handling fee and "mining" GOV by returning LP.

As you can easily guess, this process has created a veritable gold rush among DeFi users. At the same time, thanks to Yield Farming, it is a good opportunity not to be missed by providing liquidity to a pool to get "free" Token. So, what is Yield Farming and how does it use liquidity mining?

Yield farming is a simple process on top of liquidity mining that leverages its key features to maximize user revenue. In essence, yield farming is to use various mechanisms such as liquidity mining, fund leverage, and risk selection to flow your own liquidity between various DeFi platforms.

On June 16, Compound began to distribute governance tokens to users, and the idea of yield farming was born. Users accumulate COMP by "borrowing" and "buying" stablecoins, and then distribute them. After this idea and the surge in the value of COMP Token, any project in the DeFi world wants to create its own Token and distribute it to motivate users to go to a certain platform for transactions. Therefore, liquidity mining and yield farming are carried out at the same time: by earning governance tokens, transferring one's own stable coins, etc., to maximize profits.

Soon after, many platforms promised a very high APY (annualized rate of return), but it was almost impossible for individuals to find the highest-yielding project within a certain period of time. So there is a project like, a platform that automatically manages funds through risk selection for yield farming.

What do you think of these two strategies? Do you think DeFi is an industry to watch?

Original title: "DeFi丨Liquidity mining VS yield farming, what are the similarities and differences? "Written by: Gianmarco Guazzo Translated by: Olivia


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