Last week I wrote about Liquidity Pools. Today I'll be going deeper.
Kinda like a Part 2!
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Kinda like a Part 2!
๐ช๐ต๐ฎ๐ ๐ถ๐ ๐๐ถ๐พ๐๐ถ๐ฑ๐ถ๐๐ ๐ ๐ถ๐ป๐ถ๐ป๐ด?
A Thread ๐งต
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From the word 'MINING', someone might think of Blockchain mining for example in terms of #Bitcoin but no it doesn't involve block mining at all.
In fact it's a much more simpler process.
1/n
In fact it's a much more simpler process.
1/n
DEFINITION:
Liquidity mining is an investment strategy in which participants within a DeFi protocol contribute their crypto assets to make it easy for others to trade within a platform.
2/n
Liquidity mining is an investment strategy in which participants within a DeFi protocol contribute their crypto assets to make it easy for others to trade within a platform.
2/n
Liquidity Miners (Liquidity Providers) are incentivised to provide token pairs into a Liquidity pool.
When a transaction occurs in a liquidity pool, fees are charged.
The fees charged go to the Liquidity Providers.
3/n
When a transaction occurs in a liquidity pool, fees are charged.
The fees charged go to the Liquidity Providers.
3/n
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Let's take a look at a Decentralised App (#DApps) like #PancakeSwap for example.
1. You head to Pancakeswap website, add your wallet and click on Liquidity.
4/n
Let's take a look at a Decentralised App (#DApps) like #PancakeSwap for example.
1. You head to Pancakeswap website, add your wallet and click on Liquidity.
4/n
2. Like I said 1:1 dollar price pair of tokens.
E.g for a ETH/DAI pool, 1 ETH must be paired with 2,012 DAI (as required by current market price).
If we look at the picture below, we see that less than 0.01% of the liquidity is what is being provided.
5/n
E.g for a ETH/DAI pool, 1 ETH must be paired with 2,012 DAI (as required by current market price).
If we look at the picture below, we see that less than 0.01% of the liquidity is what is being provided.
5/n
3. You get LP tokens.
These LP tokens can be withdrawn at anytime and you make a profit depending on how much percentage of liquidity you provided.
It can also be staked or farmed to earn even much more yield.
6/n
These LP tokens can be withdrawn at anytime and you make a profit depending on how much percentage of liquidity you provided.
It can also be staked or farmed to earn even much more yield.
6/n
PROS of Liquidity Mining
- Ability to provide liquidity to kick-start a platform and ensure initial growth.
- Intelligent and fair distribution of tokens promotes decentralisation of a project.
7/n
- Ability to provide liquidity to kick-start a platform and ensure initial growth.
- Intelligent and fair distribution of tokens promotes decentralisation of a project.
7/n
CONS
- Smart contracts could be hacked or vulnerabilities could be exploited.
- Little to No Regulations or KYC.
- Impermanent Loss.
8/n
- Smart contracts could be hacked or vulnerabilities could be exploited.
- Little to No Regulations or KYC.
- Impermanent Loss.
8/n
Recap
0: Liquidity Pools (Part 2)
1: What is Liquidity Mining.
2: Definition
3: Explanation
4-6: Steps involved
5: Pros
6: Cons
0: Liquidity Pools (Part 2)
1: What is Liquidity Mining.
2: Definition
3: Explanation
4-6: Steps involved
5: Pros
6: Cons
If you found this thread educative, kindly hit the like and retweet button on the first tweet.
Check out my last thread on Liquidity Pools
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https://mobile.twitter.com/cryptobafemi/status/1556369982904311808
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