Are you wondering what liquid mining crypto is? We need to understand what liquidity and liquid mining is before we know more about liquidity mining crypto.
Liquidity refers to all liquid assets in exchange and brokers. It helps you determine how fast you can purchase and sell an asset at a fair price without affecting its marketplace. Liquidity is affected by three properties. They include;
This determines how fast you can make an order. For that reason, low liquidity can lead to order delays while high liquidity can make your orders quick.
The gap between a bid and a bidder can also affect liquidity. If liquidity is low then there is a large gap or spread between the bid and the order.
Low liquidity means that the orders are more likely to spill or not to execute.
There are also three levels of liquidity:
- Asset liquidity
In asset liquidity there are buyers and sellers for the particular asset.
- Exchange liquidity
There is trading pairs, makers, any takers on the trading platform.
- Market liquidity
The assets and exchange liquidity make up the crypto market.
Crypto Liquidity Mining
Liquid mining also known as yield farming is providing liquidity to decentralized exchanges (DEXs) using cryptocurrencies. Decentralized exchanges reward users who are willing to bring liquidity to the market. Crypto liquidity mining is just like banking where you deposit money and the bank uses the money and gives you interest in return.
Decentrailzed exchanges are now using the Automated Market Maker also known as the AMM instead of the traditional order book model. Moreover, the AMM enhances efficiency and allows the trading of digital assets through smart contracts.
Liquidity pool meaning
What is the liquidity pool meaning? The liquidity pool is used in Decentralized exchanges to increase liquidity in the market. It also provides a pool in smart contracts. Increasing the market’s liquidity lowers transaction costs for traders making it efficient for asset trading. Liquidity pool is also used in most crypto concepts like automated market makers, on-chain insurance, and borrow lend protocols.
How liquidity pool mining works
In the new pool created the first liquidity provider sets the price of the asset in the pool. The liquid provider gets an incentive to give the same value for the two tokens in the pool. If the token price in the pool is different from the current market price then there is arbitrage. However, there is a capital loss and other liquidity providers can put their funds to the pool. There is a price adjustment for every token swap in the liquidity pool according to the Automated Market Maker.
The Uniswap uses a constant Automatic market maker that ensures that the product of the two tokens is the same. The trading size doesn’t matter. And for that reason, the Automatic market maker ensures that the pool provides liquidity. The Automatic market maker increases the cost of the token as well as the quantity also increases.
What entails in liquidity pool mining;
A Liquidity provider
A liquidity provider provides liquidity to the trading platform like the DEXs by depositing their assets. The Decentralized Exchanges issue a token or reward as a receipt of funds you deposited. The tokens get withdrawn liquidity or traded in an open market platform. Also, on the Decentralised exchanges platform, a liquidity provider gets rewarded with a share in the trading fee.
A liquidity pool
In the liquidity pool, the liquidity provider deposits its assets to the platform. In the DEX platform, they use a dual asset pool for a complete assets market.
Platforms using the liquidity pool
There are various platforms used in the liquidity pool but here are just but a few;
• Lending platforms
Moreover, these are decentralized platforms used for borrowing and lending. The lending platforms use a single asset liquidity pool that consists of a single asset.
• Dual Asset liquidity pool
These include decentralized exchanges like the Uniswap, Bancor, and Sushi swap among others.
Some benefits come with liquidity pool mining. They include:
- Firstly, liquidity pools provide liquidity to trading platforms.
- They also help a decentralized ecosystem function with the new model books.
- Liquidity pools help in earning passive income because of their attractiveness.
- Finally, liquidity pools are a very attractive means for Holders to earn passive income