In recent months, we have witnessed constant discussions about the future of liquidity mining. As one of the core functions of Defi, liquidity mining is closely connected to the whole blockchain and crypto industry, so it definitely has a future. However, the sad end of some liquidity mining projects and many scams surely opens a door for improvements and reconstructions of the current models. With some new implementation, liquidity mining could be reshaped into something highly useful and revolutionize the financial systems.
What is liquidity mining?
The most popular definition of liquidity mining is an investment strategy used by participants to lend their crypto assets in order to facilitate the trading process between other participants and get rewarded for this. The rewards could be issued tokens or fees. However, the primary purpose of this concept was to propose an alternative to the order-book model system and suggest a way of interaction without the need for a third party.
Liquidity mining offered a new system and it gained popularity fast. Moreover, it is currently one of the most popular ways of yield farming because investors can earn passive income while contributing to something meaningful. Actually, liquidity mining is beneficial for all participants: liquidity providers get rewards, traders get a fast and efficient market and the platform builds a community.
The working system is simple – participants deposit their assets into a liquidity pool that usually consists of a trading pair (for example MAT/USDT). By depositing their assets, liquidity providers make it easier for traders to make deals. Also, the contribution is proportional to the rewards – the more they contribute, the larger the reward they receive.
What is the current state of liquidity mining?
The peak of its popularity was in 2021 when everyone was talking about it and wanted to participate. At the moment, people are much more careful due to the increasing number of not-reliable liquidity pools. In reality, the liquidity mining concept has some key advantages – if the providing platform is reliable, it can actually bring passive income. The system allows anyone to participate, no matter the size of the holdings, and increase them. Also, anyone can be part of the governance and participate in important decisions.
Currently, liquidity mining can be done via centralized and decentralized exchanges. The way DEXs and CEXs serve liquidity mining is different. While DEXs rely on liquidity pools and participants in order to work, centralized exchanges are different. Usually CEXs source liquidity similar to the TradFI system – using a third-party market maker or in-house reserves. Sometimes it is possible for a larger exchange to play the role of a market maker for a small exchange that doesn’t have reserves.
One of the key problems that still hasn’t been resolved is impermanent loss. This is the possibility of losing the value of the assets during certain periods, but it is “impermanent” since it can be realized only if the assets are taken out at the understated price. Security risks are always part of any software. For open-source projects with publicly available codes, this risk is even higher. Another current problem is the many non-secure platforms that could be a scam. That is why it is important to DYOR and choose a reliable platform.
Gate.io has a number of advantages to being chosen as a liquidity mining platform:
- It is secure – Gate.io is famous as one of the safest exchanges and it is ranked second among 100 other crypto exchanges in security by a third-party security testing laboratory.
- It has high liquidity – Gate.io uses an automated market maker approach and has a high trading volume which provides bigger fee revenue to the liquidity providers.
- Variety of coins – Gate.io offers a broad asset portfolio which eliminates the need to use multiple platforms and saves time and money.
- Guidelines – time, research, and preparation are required in order to use efficiently DEXs; Gate.io offers guides that can help any investor
Try liquidity mining with Gate.io at https://www.gate.io/liquidity
What is the future?
Undeniably, liquidity mining has big potential for the future. There are many different ideas and suggestions on how it could transform. Some believe that there will be one global trading market with access to all available crypto liquidity. The possibility to trade across many different exchanges and manage different pairs sounds very attempting. Such a scenario would make the movement of assets easier and faster.
As a whole, the direction that it is moving is to an even more decentralized nature. Traders and investors could have more control and options. This will increase trust and more people will be attracted to using this concept. The main goal is to increase the motivation of participants. This will also increase the time spent on investments, probably an increased number of long-term deposits and higher rewards.
With the development, probably many different reward programs will probably be invented that will give more opportunities to investors. The safety systems should be updated and finally polish the DeFi concept.
Just like everything new, liquidity mining needs to go through improvements, developments, and updates. The base idea and structure of the system are clear, stable, and most importantly – valuable. Liquidity mining as one of the most popular yield farming strategies has many pros and it is an inseparable part of the DeFi network.
Author: Kristina Micheva, Gate.io Community Manager, Researcher