What is liquidity mining, and how does it work?
Bitcoin and cryptocurrencies are once again in a strong upward trend and are thus attracting attention. The reason for this is also the rapid growth in the field of decentralized finance (DeFi). Investors can generate cash flow through cryptocurrencies and FIAT currencies in various ways. Liquidity mining is one of the best-known forms.
An important factor in this context is also the emergence of new trading venues. Until now, cryptocurrencies were traded exclusively on a centralized exchange (CEX). However, smart contracts can also give rise to decentralized exchanges (DEX) that function completely automatically and autonomously.
Digitalization affects the financial sector in many aspects. Increasingly, new investment products are emerging that are organized in a decentralized manner. The complete automation of such protocols often makes them cheaper and more secure than conventional applications.
Decentralized finance (DeFi) is on the rise
In 2020, numerous projects focusing on decentralized finance (DeFi) were able to generate high price gains. One example of this is Yearn.Finance, whose token was able to rise to around 48,000 US dollars at times.
One reason for the rising demand is the high returns that are possible. Besides, investors can profit from possible price gains of the tokens. While classic forms of investment such as savings books do not generate any profits due to low-interest rates, providers in the DeFi sector often offer up to ten percent annually.
The lending and borrowing of capital represent the largest share. The process is fully automated using smart contracts. This means that the participants can do without an intermediary, and the programming code creates the basis of trust.
Decentralized finance also refers to the trading of cryptocurrencies on decentralized exchanges or marketplaces (DEX). These differ from central exchanges (CEX) in that no company runs and manages the platform. Instead, it is a chain of smart contracts that enables automated exchanges. Under certain circumstances, however, these can have security vulnerabilities and pose an increased risk for users.