What is Defi liquidity mining? EXPLAINED

What is Defi liquidity mining? EXPLAINED

By NassiroV | CryptoPlanet360 | 3 Aug 2020

Ethereum DeFi Broke Records in June, But Other Categories Are ...

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The DeFi ecosystem has not ceased to be talked about for several months. The enthusiasm reached new heights following the distribution of COMP and BAL tokens by an innovative process in the ecosystem: Liquidity Mining. Let's come back to this phenomenon together. 

What is Liquidity Mining?

The Liquidity Mining represents a new way for crypto project to distribute tokens . Unlike ICOs, STOs, and other IEOs, tokens are not sold to investors. These must be earned.

To do this, users must take part in the operation of the protocol by providing liquidity to it. Subsequently, the protocol redistributes said tokens proportionally to the different liquidity providers.

Until now, the majority, if not all, of the tokens that can be acquired by doing  Liquidity Mining  are governance tokens . They allow their holder to take part in decisions relating to the protocol through votes.

The distribution method then takes on its full meaning. Thanks to Liquidity Mining, the creators of a project ensure that the tokens go to supporters of the protocol, who take the risk of providing liquidity. So that, when the protocol is modified, the actual users of the protocol have their say.

Obviously, it happens in many cases that a portion of these tokens are pre-distributed to members of the project team as well as to their affiliates.

Which projects allow Liquidity Mining?

At the moment, only a handful of projects are able to offer distribution via Liquidity Mining (LM):

  • Compound with the COMP token , 10 million tokens issued in total, of which 4.2 million through the LM;
  • Balancing with the BAL token , 100 million tokens issued in total, of which 75 million through the LM;
  • Curve Finance with the CRV token , 3.03 billion tokens issued in total, of which 1.85 billion through the LM;
  • Universal Market Access with the UMA token , for which the number of tokens is unknown at the moment;
  • yEarn with the YFI token , 60,000 tokens maximum for the moment, fully distributed through the LM;
  • bZx with the BZRX token , 1.03 billion tokens issued in total, of which 3% through the LM;
  • mStable with the MTA token , 20 million tokens issued in total, of which 4 million through the LM.

Overview of the monthly distributions of several DeFi projects, some of them through liquidity mining Overview of the monthly distributions of several DeFi projects, some of them through liquidity mining - Source: Messari .

As we can see, the strategies differ from project to project. Some have chosen to allocate tokens to their development teams , while others like yEarn have made the choice of full decentralization with 100% of the tokens distributed through liquidity mining .

Comparison with the Proof of Work

In some measures it may be interesting to compare Liquidity Mining with other token distribution methods, such as Proof of Work .

Indeed, in both cases, these two methods go further than the simple distribution of tokens. Indeed, the objective is also to reward an actor of the system for a given service. In the case of PoW , the validation of transactions, in the case of  Liquidity Mining, the provision of liquidity to the protocol.

This mechanism makes it possible to encourage new users to try the protocol, as well as to take part in its operation:

  • either by providing computing power in the case of PoW,
  • or by providing liquidity in the case of Liquidity Mining.

Some tools

If you want to take part in this phenomenon, here is a non-exhaustive list of tools that can allow you to track or estimate your returns:

  • The Zapper.fi wallet tracker allows you to track the tokens accumulated in liquidity mining on several protocols, including COMP. It also allows you to easily join certain pools.
  • The predictions.exchange tool which allows you to estimate the BAL or COMP generated according to the chosen pools.
  • The Silver mobile wallet , which gives access to several DeFi protocols offering LM, such as Compound.
  • The Hal notification bot to alert you when transaction fees are low, a must-have to avoid wasting potential gains in transaction fees.

Other projects, mainly from the DeFi ecosystem, could well appropriate this mode of distribution in the future. Obviously, as with the rise of ICOs, you must remain vigilant about the security of the protocols offering Liquidity Mining to ensure that your funds are not put at risk. 

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Hi, and welcome to my blogs :)! ​I’m Nassir, a thirty-something guy who loves to travel and write, especially about Crypto and Blockchain. I have been blogging and trading cryptocurrencies for a while. I hope that you find my articles beneficial to you.


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