Let’s begin our understanding of liquidity in terms of cryptocurrency, by simply understanding the concept of liquidity! What does liquidity mean and how is it going to affect the market?
The term liquidity refers to the convertibility of an asset or security fund into a quickly payable monetary value that can be used to fulfil the financial obligations. This efficiency of an asset determines its worth and also the reliability of its future transactional potential. To start investing in bitcoins you can visit BitQT
What is Liquidity mining?
Liquidity mining is a way to ensure conversion-based trade that takes place between different cryptocurrencies, we know that as the crypto market is expanding day-by-day the possibilities of launching of new tokens and cryptocurrencies are taking place.
Now, every blockchain network user wants a process through which he is able to facilitate crypto trading through the different pairs of tokens.
Liquidity mining also provides incentives and rewards based on the amount of liquidity one user provides, after providing the liquidity he is eligible for receiving the incentives in form of governance tokens and other rewards available according to different blockchain protocols.
How does Liquidity mining work?
Liquidity mining is based on the inter relationship between the liquidity rate and liquidity providers, which came into effect in 2017 when a biggest decentralized exchange name IDEX introduced a unique incentive program for the liquidity providers.
This program forms a basis for those idle cryptocurrencies that are either locked by the liquidity providers under the DeFi platforms or are wasted in their hot wallets.
It encourages them to use these currencies in crypto trading where they can deposit their currencies in the form of a liquidity fund and earn some rewards on the transactional fees charged upon the deposits. These liquidity providers are also called market makers, because they inject liquidity through their deposits of cryptocurrencies, which in return is the biggest driving force of a Decentralised finance.
Therefore, these market makers have to sign up for any cryptocurrency which is linked to a smart contract chain, have to purchase it and have to set it limit order and then have to store it under the hot wallet. After each swap on their stored amount, they will receive the reward in form of that platform’s native token.
Benefits of Liquidity mining?
How does liquidity mining help in gaining benefits from performing this process? Let’s get dive into its benefits without doing any further delay:
Equal distribution of the token
Unlike the offline cash system, it marks an end of the concept of biased distribution of capitals and tokens where a certain group is favored by the distributors, instead of creating a prioritized rule, it keeps it simple and fair.
All-round Profit earning opportunities
The profit which is earned through this opportunity is profitable for both the crypto exchange platforms and liquidity providers, through its innovative strategies of engaging participation of its communities.
Community based governance
The liquidity mining provides a community-based governance where the strategy is to bring more reliable communities which will help in the propagation of a crypto project that needs support and modifications in its protocols.
Innovative inflow of capital
As the liquidity mining aims at generating the profit and stable income for the crypto market makers and exchange platforms,
Liquidity mining is the most functioning limb of a decentralized finance, it not only aims at making it a community-owned project but also helps in creating a stable income for the market makers, it also brings equity at the time of token distributions among the investors.