Liquidity mining is now a considerably large portion of the DeFi space. It has become one of the favorite ways for crypto users to earn extra cryptocurrencies by using their idle crypto assets. And with the year 2020 dedicated to the rampant momentum of the DeFi projects, it now all the more common.
By the end of 2020, the total Value Locked (TLV) in decentralized finance protocols skyrocketed to $25 billion. And today, TLV stands at $71 billion, representing a massive growth in just the first two months of 2021.
Recently, we shared a blog post discussing the several lucrative methods you could use to earn crypto. In this blog post, we’ll dive deep into the nuances of earning crypto with liquidity mining. We will explore the various decentralized protocols where you can earn crypto through liquidity mining and add a stream of passive income. But first, let’s understand the basics.
What is Liquidity Mining?
Decentralized protocols such as a crypto exchange or a lending protocol depend on its users to add liquidity to the protocol. The other users then use these tokens to borrow loans or trade other tokens with the present liquidity. Since maintaining liquidity is of paramount importance to these applications, they incentivize the liquidity providers with more cryptocurrencies.
This act of providing liquidity to these protocols for a handsome incentive in the form of cryptocurrencies is called liquidity mining. And the users who provide liquidity are called liquidity miners or liquidity providers. The reward you earn from liquidity mining could is from the interest your funds earn as well as the trading fees charged by the protocol.
Now that we know what liquidity mining is and how it works, let’s take a look at the five most popular platforms where you can start earning crypto.
5 Best Protocols for Liquidity Mining
With the DeFi space booming, there are tonnes of decentralized protocols where you can become a liquidity miner. It’s literally a matter of minutes before you can jump n and start liquidity mining. But as we always advise, you should do your own research before putting your money anywhere.
If you want to take our word for it, here are the five most popular DeFi protocols to start liquidity mining:
Compound Finance is one of the most popular and largest decentralized lending and borrowing protocol. It is also one of the first protocols that actually drove DeFi towards popularity. Compound replaces banks from the borrowing and lending equation with a smart contract. It allows users to instantly lend and borrow cryptocurrencies with each other. As a crypto holder, you can add your crypto tokens to the liquidity pool of Compound and earn an interest every time a user borrows from your liquidity pool.
Aave serves the same purpose as Compound. It is a decentralized lending and borrowing protocol where you can lend your idle crypto assets. Although the same, both Aave and Compound offer different interest rates on the amount you lend. You should always research to find the protocol that offers the highest security and return. Aave has garnered great traction and is currently the third largest DeFi platform.
Balancer is an automated market maker that allows you to create a liquidity pool or add liquidity to an existing pool. When you add liquidity using Blanacer, the protocol rewards you the trading fees users pay for transactions. The balancer is the 9th largest DeFi protocol in the market.
Curve is a decentralized exchange. It allows users to effectively trade stable coins with a low fee. Curve relies on liquidity providers to add their stablecoins to its pools. If you own stablecoins, it is one of the best ways to start earning from it. You can add your coins to a liquidity pool and earn the trading fee users pay for transactions.
Uniswap is an Ethereum-based exchange protocol. Similar to Curve, it relies on liquidity providers to add liquidity to its pools. The traders on Uniswap pay 0.3% as transaction fees, which is then rewarded to the users. So, you can add your crypto tokens in a Unisap liquidity pool and start liquidity mining today. You guys might remember the Uniswap Airdrop that was quite lucrative. And if you missed that, now you have a good reason to still explore the platform.
Liquidity Mining Demands Precaution
Liquidity mining is one of the simplest ways you can add a passive income stream to your earnings. However, decentralized protocols are still a nascent concept, and they are vulnerable to different risks. A simple flaw in their code can allows attackers to steal funds from the mining pool. Or, the volatility of a cryptocurrency can lead you to lose the value of your capital. To top that, we also have the never-ending crypto scams that you need to be aware of.
All that said, we have no doubt that liquidity mining can be a lucrative way to earn cryptos as long as you make research-based decisions.