What is Liquidity Mining?
Last updated
Last updated
To understand liquidity mining, let's first look at what a decentralized exchange is. As the name suggests, a decentralized exchange is nothing else than an exchange platform where you can trade/swap certain coins for others - but in a fully decentralized way.
This means there is no central intermediary (such as a bank or, in the crypto world, a CEX like Binance) that ensures that the trade between two participants is carried out correctly. Instead, a protocol (a smart contract that runs on the blockchain) takes over this task and creates a secure transaction between the participants.
This leads to five major advantages:
At the present moment, you are not required to reveal your identity on a decentralized exchange.
This is especially interesting for people who may be prohibited from accessing certain trading markets by various governments.
The fees generated by trading in a decentralized exchange flow back to the participants (to be exact, to the liquidity provider). The intermediary does not become filthy rich just by existing.
Trading is censorship resistant and cannot be significantly influenced by any central authority within a short period of time.
Every coin can be traded on a decentralized exchange, which leads to a high volume and innovation.
So now you can probably imagine that it is not so easy to make the trade between two people directly. For example, one person wants to exchange 10 BTC for Ethereum, but someone else might not be able to do anything with such an amount.
This is where liquidity pools (Hives) come into place. A pool ensures that there is always enough liquidity available between two cryptocurrencies. Since this money is not provided by an organizing authority, it has to be provided by the community. And that's exactly what you do when you do liquidity mining; you provide liquidity (capital) to a decentralized exchange so that others can use that liquidity to swap between tokens.
Let's take a look at how the return is created. Without some incentive, of course, no one would provide liquidity and this is where trading profits come in.
As with a centralized exchange, those who execute a trade pay a small fee on that trade. However, the fees are distributed to those who have proactively supported the decentralized exchange and provided liquidity.
Yet, this is not the only way to generate returns. Most platforms give the Liquidity Miners their own platform token as a reward in addition to the transaction fees. This generates even more annual returns. With Grizzly.fi you have the opportunity to earn the Grizzly Honey ($GHNY) token, which acts as fuel for the entire ecosystem.
Grizzly.fi is not a DEX, but a liquidity aggregator; it connects to various existing DEXes that allow liquidity mining and combines the best of them into one neatly structured place. As an aggregator we collect the rewards paid out by the platforms for you and re-invest them automatically. This means our users generate better yields than when investing into the platform directly. A super convenient set and forget solution.
Let's move on to the risks and how Grizzly.fi minimizes them.
The decentralized exchange that offers the whole thing should be robust against smart contract errors. If this is not the case, a hacker could gain access. Grizzly.fi therefore only invests in projects that have been tested several times by experts for possible errors, already have a large volume and have existed for a long time.
The second risk is the token risk of the respective project. If the price of the coin you receive as a reward decreases, the corresponding return will naturally decrease as well. With Grizzly.fi’s platform token $GHNY this can also occur.
If you don't want to take the risk that comes with speculating on our token, you can choose the Stablecoin Strategy and all your rewards will immediately be swapped to stablecoins and re-invested to profit from the compound effect.
If you want a mixed solution you can choose the Standard Strategy; 30% of the awards will be paid out in our Grizzly Honey token, 70% swaped to stablecoins and reinvested.
If you truly believe in the platform and the token, the Grizzly Strategy pays 100% of the generated rewards in $GHNYs.
The third risk is called impermanent loss. This risk occurs when you do liquidity mining with volatile currencies. If the price development of the two coins in a Pool/Hive differs from each other. The one who provides the liquidity is often left with the worse performing currency of the two. The Swiss Federal Institute of Technology (ETH Zürich) published a paper about liquidity mining. They found out that the average miner makes around 0% gains at the end of the year - due to impermanent loss. What their studies have shown is that mining with stable coin pairs is the safest and (generally speaking) the most profitable way to generate a steady income out of liquidity mining. Grizzly.fi has its focus on exactly such stablecoin pairs! We also avoid pairs with stablecoins that have a questionable reputation - such as Tether.
In conclusion, liquidity mining is a serious way to participate in the new blockchain technology, but at the same time - if done right - not be exposed to high volatility and high losses.