What is Liquidity Mining? New mining secret for small investors.

Bitcoin has created a wave of speculation on the crypto market with a significant increase from about $5,000 last March to approximately $60000 at the present. Thanks to this heat, the crypto market has been recovered from the economic recession caused by Corona Pandemic in 2020. Beyond that, the crypto market is continuing to develop in comparison to many other fields that are extremely affected by the COVID-19 pandemic.

The massive cash flow into the market has led to the introduction of many new technologies and protocols, especially the explosion of Defi (decentralized finance). The biggest trend of “Bitcoin mining” in 2017 is gradually being replaced by “Liquidity Mining” – a new form of mining that brings real value to the market as well as meets investor expectations.

Is mining Bitcoin still profitable?

Bitcoin-Logo
Is mining Bitcoin still profitable?

If you are an individual investor, the answer is “NO” in short term. Mining Bitcoin requires a big investment of hard costs and costs incurred that make it quite complicated and expensive to mine for individuals.

Hard costs include investment in mining equipment, which is often very expensive if you want to buy good quality hardware. In addition, the electricity bills are also needed to be considered as mining machines operate continuously and consume a lot of electricity. The average worldwide electricity cost to mine 1 BTC is about $5,000.

In terms of costs incurred, mining fees and additional costs such as storage fees and especially storing costs are the fees that miners must bear. Since the mining machines produce heat, they should be kept in a large and cool space.

On the other hand, mining machines typically last only 2 years and miners need to regularly upgrade technology in order to keep up with speed. Besides, miners can face some minor problems such as damaged equipment, power outages, system outages, and market dump.

Since Bitcoin mining is costly and it is in the question of creating any real value to the market, a new form of mining has recently been introduced and attracted a huge investment wave from investors around the world. The reason is that this form of mining is highly profitable but does not require hard capital and costs like Bitcoin. It also does not have to compete fiercely with large corporations. That is “Liquidity mining”

“Liquidity mining” – the future trend of mining.

What is liquidity pool?

Liquidity-pool
Liquidity mining là gì?

To understand the concept of Liquidity mining, let us first find out what is a Liquidity pool.

Imagine the Liquidity pool is like a bank’s treasury, which contains your national currency (such as EUR) and foreign currency. If you want to convert EUR to USD, you need to deposit EUR into the bank treasury and receive USD minus transaction fees for the bank. Liquidity pool has a similar function but on a larger scale and provides more currency pairs and, most importantly, is decentralized.

An example is if CZ wants to exchange one billion USD at Bank A for EUR, but unfortunately, Bank A is small and does not have enough EUR to process this transaction? In this case, CZ will find other banks that are big enough to make his transaction. Those large-scale banks attract more people to deposit money there to receive interest.

The same goes for the Liquidity Pool. If an exchange wants to grow on a large scale, it needs to attract more money from users. That is, users will deposit their money in a pool to make liquidity for exchanging and they will receive interest. At the same time, their money can be withdrawn at any time, no term deposit is required as many traditional banks do.

Đọc thêm: Liquidity – Thanh khoản là gì? 3 điều bạn cần biết về tính thanh khoản để chiến thắng thị trường crypto

How can Liquidity Pool attract many people to provide liquidity?

The revenue of the Liquidity pool is from the transaction fee when end-users make transactions, such as borrowing, lending, and exchanging coins. This revenue will be re-distributed to the liquidity providers according to the proportion of the liquidity they provided into the pool.

Apart from transaction fees, many protocols implement Liquidity mining. This new form of mining rewards profits for investors who already provide liquidity into their protocol. How does Liquidity mining work? This question will be answered in the next section.

In short, it can be understood simply that:

Liquidity mining is a form of free token distribution out of the market that encourages users to provide low liquidity for the protocol for a certain period of time.

How does Liquidity mining work?

hoi-dap
Liquidity mining hoạt động như thế nào?

Liquidity Mining describes the process of supplying liquidity to Liquidity pool in exchange for a native token (the cryptocurrency of that project). These native tokens are valuable. The profits from liquidity mining usually range from a few hundred percent to a few thousand percent per year.

Đọc thêm: Liquidity Mining lấy tiền từ đâu trả cho nhà đầu tư?

What unique about Liquidity Mining (LM) compared to Bitcoin mining is that it creates a real value for the market when it provides liquidity to traders. When participating in the LM, liquidity providers do not need to buy tokens but are rewarded with tokens. Usually, it is an administrative token that gives the holders the right to vote on decisions on that protocol, including its economic mechanisms (tokenomic).

With this operation method, Liquidity Mining is a revolution that helps individual investors to gain more profits and avoid the domination of big companies.

Liquidity mining: long-term investment or just a financial bubble?

bong-bóng-tài-chính
financial bubbles and potential dangers

Most of the liquidity in current Liquidity Mining (LM) projects comes from investors looking for high returns in a short term. Their loyalty and dedication to the project are in question. It is like the situation of startup companies when most customers only use the services or products because of special offers, rewards, or free vouchers.

To solve this problem, LM projects change their policy from short-term liquidity to long-term liquidity. Ampleforth – a Defi protocol – has done a good job with the “time multiplier” mechanism in their Geyser project. This mechanism allows them to reward based on the deposit period. The reward will increase from 1x on the first day to 2x on the 30th and 3x on the 60th. According to the development team’s update on August 4th, 2020 (43 days after the project’s launch), the figures are very positive. About 6,036 users tried Geyser, with 4,242 users still active until that day (equal to 70% of total users).

LaunchZone (a.k.a Bscex) also has a great way to solve this problem. They release only 20% of mined coins and block 80% of the remaining coins within a year (or 6 months). With this policy, the project can avoid big sell-offs after mining and, thus, create more trust for liquidity providers.

chien-luoc-chuyen-thanh-khoan-dai-han
Spot 25% but 75% locked for 1 year

LaunchZone has created a great reputation when giving investors the opportunity to buy coins and tokens with a potential of x10, x100 in a short time. For this reason, the project can implement more long-term plans and attract more capital to its breakthrough technology.

That is how many projects attract capital into their protocol through Liquidity Mining. With many Liquidity Mining growing extremely fast and achieving huge profits, Defi becomes hotter than ever.

Summary

Keeping this current growth rate of cryptocurrency, not only will BTC reach its new ATH, but also the world can witness a great development of new protocols, new financial instruments. Defi is expected to bring great value to society.

If this situation happens, Liquidity Mining will be the key to opening a new future for decentralized finance, as well as the current traditional finance.

Therefore, LaunchZone has applied this mining form to their own product LaunchpoolX with the aim of attracting liquidity into the market. LaunchZone is creating a great profit for their investors who believe in the project. It is expected to explode even more in the future. 

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