Liquidity Mining vs Yield Farming
A simple guide to understanding two of the most interesting phenomena in the world of crypto, Yield Farming, and Liquidity Mining. What is the difference between these two?
For fans in the world of cryptocurrencies and the Blockchain, 2020 is definitely the year of Defi: believe it or not, the shifted numbers and interest around this topic have boomed in recent months. According to some, DeFi is nothing more than the umpteenth bubble within a world still in its infancy in which FOMO, the promise of exorbitant returns and the use of phantom governance tokens are depopulating. As analyzed in the previous articles, DeFi is undoubtedly a cauldron in which we find an infinity of strategies, terms and projects in the most diverse fields, from DEX to Synthetic assets passing through the Lending Platform and the Asset Management Platform.
In this article, we try to clarify two terms that are too often confused and used one instead of the other, namely Liquidity Mining and Yield Farming.
Liquidity Mining: earning tokens by giving liquidity
Liquidity mining arises from two very important concepts in the world of cryptocurrencies, liquidity and mining. By liquidity, we mean the availability of coins/tokens in a given platform, essential for the creation, growth and expansion of DeFi markets. By mining, on the other hand, we mean the PoW-based technique in which by making the computational power available you receive new coins just minted by the algorithm. These two concepts, although distant from each other, can be joined together to create a process that has certainly favoured the boom of some DeFi projects.
Basically, a person who wants to do liquidity mining “lends” liquidity to a certain pool (basically on Uniswap) and depending on the time and the amount of liquidity provided receives new tokens just minted. Let’s take an example to clarify possible doubts.
A new platform in the world of DeFi has governance tokens (GOV) that it wants to distribute. To do this, in his white paper or on his landing page, he describes some Uniswap pools from which these GOV can be received through liquidity mining.
- The person interested in the project and the possibility of receiving these GOV must give liquidity to one of the pools described above.
- The user receives in exchange the LP (Liquidity Provider Token) that will be needed for the final redeem.
- As long as the tokens provided by the user remain in the pool, he earns both 0.3% swap and the governance tokens that are “mined” at each block.
- At the time of redeeming, the user by returning the LP receives in exchange both the fees and the “farmed” GOV.
This process, as you can easily guess, has created a real gold rush on the part of DeFi users. Thanks also to Yield Farming, the possibility of receiving “free” tokens by providing liquidity to a pool was an opportunity not to be missed. So what is Yield Farming and how does it use Liquidity Mining?
Yield Farming: Maximize yield by automatically moving funds
Yield Farming is a process that is positioned above simple liquidity mining and which takes advantage of its main features to maximize user returns. In essence, Yield Farming is the movement of one’s liquidity between the various DeFi platforms using various mechanisms such as Liquidity Mining, Fund Leverage and risk choice.
The idea of Yield Farming was born with Compound which on June 16 began distributing its Governance tokens to its users. By “lending” and “buying” the Stable coins, users accrued COMPs which were then distributed. After this idea and the explosion in terms of the value of the COMP token, any project in the world of DeFi wanted to create their own token and distribute it to incentivize users to go to a certain platform. Hence Liquidity Mining and Yield Farming at the same time: the movement of one’s Stable coins to maximize the return by earning governance tokens.
Before long, the APYs promised by many of these platforms skyrocketed and finding the highest return for a single person was next to impossible. Hence projects such as yearn.finance, i.e. platforms for the automatic management of funds through the choice of risk to be used for Yield Farming.
What do you think about these two strategies? Do you think DeFi is a sector to focus on? Let me know in the comments!
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