DeFi 101: Popular Liquidity Mining Applications
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Navigating the DeFi space can feel overwhelming with the multitudes of protocols at your fingertips. Opportunity is everywhere, with many different forms of passive income strategies, some riskier than others. Luckily, as we conquered “DeFi summer”, more applications emerged with the potential to unlock high APYs for everyone, beginner or otherwise.
Overview
Uniswap
As a leader in the space since 2020, Uniswap is rightfully in the top 3 with a TVL of over $3.8b. Armed with various ERC-20 token pools, the barrier to entry is relatively low and enables novices and pros alike to get involved. As an industry standard, Uniswap offers the ability to deposit tokens at a 1:1 ratio. This means you will need to deposit two different tokens of equal value, such as ETH and MATIC. Let’s break down what’s involved with providing liquidity to a Uniswap pool in 5 simple steps:
- Acquire equal amounts of ETH and MATIC tokens (for example)
- Head to the Uniswap pool of choice and deposit them
- Receive pool tokens that represent your token weight
- Gain fee (0.3%) and native token rewards as incentives
- When ready, withdraw rewards and burn the LP token to receive the original deposits back
Because of its decentralized and open-source nature, any individual can launch a new liquidity pool for Ethereum-based tokens without any fees, further cementing its position as a top protocol.
Balancer
Much like Uniswap, Balancer has also earned a top spot with a TVL of over 1.3b. Its unique standpoint enables anyone to deposit up to 8 tokens that can be weighted in different ways to leverage rewards. Although this method may seem advanced compared to Uniswap, it can benefit users looking to implement a strategy requiring a diverse portfolio. This can help to offset any pitfalls due to impermanent loss, where a token’s price causes your share in an LP to be worth less than the current value of your deposit. By providing liquidity, you can earn rewards such as BAL, native tokens from projects, and trading fees.
How does it work?
- Connect your wallet and add liquidity to your chosen pool
- Choose whether you want to contribute multiple assets (up to 8 per pool) or a single asset (just ETH, for example)
- Once confirmed, you will receive an LP token just like on Uniswap which represents your weight in the pool, with rewards being based on this
- Withdraw rewards and burn the LP token when you wish to receive your original assets back
These platforms achieve similar results but operate quite differently behind the scenes. Having a variety of applications working in tandem can be quite advantageous to fully maximize your returns and earn a variety of different rewards.
Curve Finance
Since its inception, Curve has been a top contender when it comes to yield farming with a highly respectable TVL of over $5.2b. If you have an eye for simplistic UIs, Curve may not be for you, but in the battlefield of DeFi yield applications, its utility prevails.
As its key focus is on stablecoins, Curve can produce an environment with less volatility while continuously upholding the high-interest rates that competitors offer. An attractive bonus is the inherently composable nature of Curve which enables participants to jump around the DeFi ecosystem using what they’ve invested in Curve to earn rewards elsewhere.
Unlike Uniswap and Balancer, Curve doesn’t always keep values in different assets equal. Instead, it concentrates liquidity near the ideal price for similarly priced assets, in a 1:1 ratio, ensuring liquidity is where it needs to be. This in turn means that Curve can achieve much higher liquidity utility.
For liquidity providers, Curve functions similarly to Uniswap and Balancer but their rewards schemes differ quite significantly. While it does still offer the same typical theme of CRV tokens, trading fees (0.04%), and native token rewards (depending on if the project has set aside tokens for this), there is extra utility baked into their veCRV token. Once locked up, veCRV will boost deposit APY. Additionally, Curve supplies these pools to other liquidity protocols such as Compound, therefore you may find extra interest rewards on top of its default trading fees.
In Summary
Liquidity mining can be a great way to get started in DeFi and begin earning rewards immediately. Although DEX fees alone may not seem the most attractive, with the multitude of protocols offering incentives, users can potentially earn very high rewards if they combine strategies. Whether you are a novice or a pro, popular applications such as Uniswap, Balancer, and Curve all provide simplistic and user-friendly interfaces to start your liquidity mining journey.
