What Is LP mining All About?
Before the disruption of DeFi, crypto holders were not given much of an option other than HODLing their crypto assets in their wallets or trading them. In today’s cryptoverse, there is a wide array of products and protocols that users can explore to generate profits.
Definitions to Know
Liquidity Pool (LP): A liquidity pool is a crowdsourced fund of crypto assets that enables and facilitates users to trade, swap, lend and borrow tokens in the market.
Liquidity Providers: Liquidity providers are individuals who fund a liquidity pool and will in turn receive rewards, usually from trading fees.
LP Token: A liquidity provider will receive LP tokens on a DEX after depositing equal values of the token pair.
The Importance of Liquidity Pools
LP Mining forms an integral component of the DeFi ecosystem that is believed to be one of the most important skills you need to know. It is a process whereby users provide liquidity on the LP where in turn they will receive rewards, usually from trading fees.
Since traditional finance, centralized exchanges and order books were utilized which could not be applied to the cryptoverse due to its decentralized nature. With liquidity pools, there is now no need for a centralized authority thanks to the introduction of automated market makers (AMM), made possible by liquidity pools.
How does it work?
Step 1: A liquidity provider heads to CoinWind and selects an LP mining project to participate in.
Step 2: He can then add liquidity by heading to the corresponding DEX platform to deposit an equal value of a token pair.
Step 3: He will receive the LP token which will represent his share in the LP.
Step 4: The user is now ready to participate in LP mining on CoinWind where he can approve the deposit on the chosen project.
Upon providing liquidity in the liquidity pool, users can earn rewards usually in the form of transaction fees that they can withdraw or compound at any time. LP Mining is a great way to earn rewards and generate passive income. However, there are many risks that come with it such as impermanent loss.
Impermanent loss occurs when the actual value of each token in the LP pool shifts, causing a mismatch in the ratio of tokens over time. This presents an opportunity for arbitrageurs as they have the incentive to purchase it at a discounted price. As the LP pool seeks to maintain the ratio, this could heavily affect the value of your returns and it could very well turn into a loss. You could very well be better off HODLing your crypto assets rather than placing them in a LP.
What can CoinWind offer?
LP pledge mining is a high-yield product provided by CoinWind for liquidity mining users. With a plethora of DeFi platforms in the crypto space, what sets us apart from other competitors in the market?
1) Save time and effort
We automatically reinvest your rewards at regular intervals with the use of smart contracts to reduce the number of user operations. At the same time, CoinWind will absorb all miner fees generated by this reinvestment.
2) Higher interest income
CoinWind automatically collects your rewards from deposits and withdrawals and compounds them for you to maximize your profits.