What is Liquidity Mining?
In the following article, I provide an overview of liquidity mining in general and explain how exactly liquidity mining can be used on DeFiChain.
Liquidity mining is one of the core mechanisms for Decentralized Finance. Basically, the term liquidity mining describes the provision of liquidity for exchange (swap) on decentralized platforms. Each user can provide one cryptocurrency pair as liquidity depending on the pools offered. This will allow other users to exchange Bitcoin for Ethereum, for example, without the need for a central authority to implement the trade in trust and maintain an order book. Liquidity is provided without an intermediary party, but directly via smart contracts, through which all transactions in the respective pool are executed. There are fees for swapping cryptocurrencies on the part of a decentralized platform. These fees are then paid to liquidity providers on a pro-rata basis to incentivise the deposit of capital and cover transaction fees. Liquidity mining can therefore be used to generate passive income on its provided cryptocurrencies. As a further incentive, most of the platforms offer their own tokens that are additionally paid out to the deployers. These tokens can in turn serve as governance tokens for the platforms, to be used to negotiate and conduct democratic votes on changes to the platform. In addition, these tokens often have value themselves and can either be exchanged for other tokens or FIAT money, or used to perform other activities on the platform (including staking).
Liquidity Mining with DeFiChain
DeFiChain offers multiple trading pairs for exchanging cryptoassets on its own decentralized exchange and, accordingly, the associated liquidity pools. Currently (06.12.2021), 8 pools of cryptocurrencies are offered, each in exchange with its own cryptocurrency DeFiChain (DFI). These include Bitcoin, Ethereum, Litecoin, Bitcoin Cash, Dogecoin and three stablecoins (USDT, USDC and DUSD). Since 06.12.2021, numerous shares and ETFs are also offered, which can be invested together with the own stablecoin DUSD for liquidity mining. These include prominent stocks like Tesla, Gamestop, and Palantir, and ETFs like ARK or SPY (S&P 500). In return for providing liquidity, users receive an APR of partly EUR 1,000. over 200% depending on the trading pair. Basically, the greater the value of the entire pool, the lower the rewards, as these are divided between the users. In order to provide liquidity on DeFiChain, the DeFiChain app is first required, including the internal wallet. Once the app and wallet are set up, DFI can be sent to the wallet address and all DeFi features can be used. In order to provide liquidity, an equal share of value (meaning an equal value in USD, for example) of DFI and another cryptocurrency is required in each case, or dUSD and a dShare. So for example. 1 BTC (price $48,000 on 06/12/2021) and approximately 10,666 DFI (price $4.50 on 06/12/2021). The internal trading place can be used for this purpose.
Setup and overview wallet
After successfully installing the mobile app and creating a wallet, all features can be accessed. In the two screenshots below, under the first tab “Credit”, you can see what a successful connection with an active wallet including credit looks like. Via “Receive”, the cryptocurrencies supported by DeFiChain can then be sent to one’s own wallet and subsequently used for liquidity mining.
Token exchange via DEX
To perform a swap on the trading venue in the next step, the sub-item Token Swap is selected in the app bar under the DEX tab. The desired amount of DFI or another offered cryptocurrency can then be exchanged there. When an amount is entered, the marketplace automatically calculates the equivalent value of the other currency. A certain fee is charged for such trading, which is then passed on to the liquidity providers. Above all, these fees are the reward and incentive for the providers.
In order to be able to provide liquidity, the sub-item Add liquidity is selected under the DEX tab. In this window all available pools can be viewed with the existing liquidity and APY. The desired trading pair is selected from these pools. After the appropriate pool has been selected, it can now be decided which quantities of the trade pair will be inserted. DeFiChain automatically calculates after entering one side (e.g. Bitcoin) how much has to be used on the other side (e.g. DFI). After the selection has been made, it is still possible to see how large one’s own share of the entire pool is before confirming the entire transaction with Supply. Among other things, this is relevant for the calculation of the so-called Impermanent Loss(link to Impermanent Loss Calculator). In principle, the cryptocurrencies inserted can also be withdrawn at any time in the previous menu via the own pools and used for other purposes.
Below is an overview of all available trading pairs with the current APR (09.12.2021)
Further information and links
The mobile app can be downloaded from the Apple App Store and Google Play Store using the links below. In addition, it is also possible to use a desktop app on a PC or laptop for Windows, Mac and Linux. As with all other blockchains, all transactions made, total value locked, masternodes and oracles used can be transparently monitored via defiscan.live.