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A Beginner’s Guide to Liquidity Mining

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There are three popular products and terms in the decentralised finance (DeFi) world that are receiving a lot of attention: yield farming, staking, and liquidity mining. These three trading strategies invite users to make use of their assets through various methods in order to maintain a decentralized protocol or app. However, the nature of these methods varies, and in this article we will explore the questions of what liquidity mining is and how to make profit on cryptocurrency arbitrage.

Liquidity Mining

In finance, the term “liquidity” means that an asset can be sold in a short period of time at a favourable price. The easier and faster you can sell it, the more liquid the product is considered to be. In the cryptocurrency world, coins with high liquidity can be easily exchanged for fiat money or other crypto assets. For this category, there is always a high demand from buyers and sellers and a relatively low spread between the purchase and sale prices.

A low spread means high coin volatility and unstable demand from market participants. For this reason, when buying a low-liquidity cryptocurrency, the probability of selling it at the same price is much lower. Put simply, if there is a large volume of trading in the market, and the prices for buying and selling do not differ much, then this is considered beneficial and reduces the risks when trading.

Why Is This Important?

High liquidity means that there is a demand for this asset from both the buyer and the seller. Amongst cryptocurrencies, Bitcoin is the most popular, which makes it easy to exchange it for other altcoins or fiat money. This can also be attributed to the rating coins included in the TOP-100 by capitalization.

What Generates Liquidity?

Liquidity is generated by counter offers for market orders in the order book. This creates a balance of supply and demand in the market. In order to avoid significant distortions at low trading volumes, exchanges attract so-called market makers and large companies. Their task is to constantly have orders in the order book at a price that does not differ from the current one by a given percentage. For this, they receive a reward and/or a reduced commission. They do not necessarily have to make transactions.

 

What is Liquidity Mining?

Liquidity mining crypto is an alternative way to make money on cryptocurrency. The user’s coins are blocked for some time and are used to provide liquidity for the project. For this, the user is rewarded. Working in this format has gained popularity in the DeFi market.

The term “mining”, which is used in the crypto market to refer to the process of mining cryptocurrency, in this context should be taken as “earnings” on the provision of liquidity.

Unlike cryptocurrency mining, a liquidity mining crypto user doesn’t need to invest in special equipment. In this case, all you need is a DeFi project and some cryptocurrency. You can start mining liquidity in a few simple steps:

  1. Find a popular project that needs liquidity (assets that it can use for its operation).
  2. By blocking coins for the needs of the project, the user becomes a so-called investor – a person who provides money at the right time.
  3. In return for providing that “investment”, the developers will reward the user with tokens of their project.
  4. The earned cryptocurrency can be immediately sold on the stock exchange, or you can wait for the growth in the value of the coins to increase profits.
  5. The more investors come to the project, the higher its liquidity is. This attracts new users and contributes to the growth of the value of the project tokens.

Let’s say you have 1000 spare UST (the stable coin of the Terra ecosystem) and you want to invest it somewhere, but you don’t want to lose it. Using the otc cryptocurrency exchange you can invest them at a great rate of interest in different cryptocurrencies and you can be sure that you will get your investment back, plus interest in one or another crypto.

How to Earn From Crypto Arbitrage Opportunities

Traders use the difference in quotes on cryptocurrency exchanges for their own interests. This way of earning is called arbitrage, and its meaning is to buy an asset cheaper on one platform and sell it more expensive on another. In theory, the concept looks simple, but in practice there are a large number of nuances that can ultimately deprive a beginner of a deposit. In such transactions, everything is often decided in a split second, or even milliseconds, so earnings depend on the speed of reaction and simple luck. To provide more crypto arbitrage opportunities for beginners, crypto enthusiasts came up with an arbitrage scanning tool that makes the process a lot easier.

Closing Thoughts

Although we have covered the basics of liquidity mining and earning from crypto arbitrage, it’s very unlikely that you will get all the necessary information from one article. That’s why we are encouraging you to read more resources before engaging in these processes. This way, you will reduce the risks associated with mining liquidity and crypto arbitrage.

Founder & Editor-In-Chief of Kivo Daily Magazine

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