If I were asked to describe cryptocurrencies with a photograph in August 2020, I would use an image of an Italian beach: crowded in summer, desolate in winter. In bull markets, everyone races to find the most exotic crypto, but when the dark season comes, everyone disappears. It is understandable given that making money in a shrinking market is difficult and requires advanced trading skills. But the advent of DeFi changed everything: it turned cryptocurrencies into an all-weather market.
As we mentioned in the previous article, DeFi introduced the possibility of using one’s own crypto to earn passive income. There are various strategies, but today we’re going to show you by far the most popular method: liquidity mining or how to “earn” through liquidity.
The process is quite simple and requires only two components: yours digital wallet (wallet)A decentralized platform for exchanging your cryptocurrencies and crypto is also defined within DEX (Decentralized Exchange).
Three steps are required:
Step 1: Provide liquidity
In order to allow us to trade cryptocurrencies, every decentralized platform needs liquidity: the peculiarity of DeFi is that anyone can provide it and therefore can be charged. Once our wallet is linked, all we have to do is deposit our preferred crypto on the platform. Please note that in most cases we will have to choose between a pair of supported cryptocurrencies and deposit an equivalent value for both coins. This requirement may seem strange to you if you’re taking your first steps in the world of DeFi, but it’s just a way to make trading more efficient.
After depositing liquidity, you will receive some type of receipt in return, more commonly known as: Liquidity Provider Tokens (LP Tokens)confirms your right to withdraw liquidity from the platform. Completing this step will allow you to start receiving commissions collected from users trading on the platform and then redistributed to liquidity providers.
Step 2: Increase your income
As mentioned above, liquidity is the lifeblood of any decentralized platform: therefore, temporary incentive schemes are often created; also rent your LP Token. Yes, you got it right: you can earn not only from your cryptocurrencies, but also from the receipt you get by depositing liquidity. All you have to do is check if the DEX you are using has an active incentive program, find and deposit the crypto pair that corresponds to your receipt.
The most interesting aspect of this step is that in most cases these rewards are much more than the revenue from the commissions of the first step. yields that can even exceed three percent.
Step 3: Collect rewards
You should know that if the income from the first step is reinvested directly by the platform, the same mechanism does not apply in the second step if your share of the provided liquidity is increased. As the days go by, you will see the number of rewards increase on the page where you deposit your LP Tokens and it will be up to you to collect them. Be careful though these are usually paid with a cryptocurrency issued by the platform itself.. This is a detail that cannot be ignored as it can jeopardize the value of your rewards: so one of the most common strategies is to redeem and sell them as soon as possible.
The beauty of DeFi is that each step reuses the result of the previous one, allowing us to increase our earnings. However, it should not be forgotten that not all of these are risk freeincluding, but not limited to, the possibility of a hacker attack, a platform malfunction, as well as the elusive “temporary loss.” In future articles, we will examine all types of risks: for now it is enough to know that the opportunity is real, but it requires awareness and attention.
Alberto Cuculachi is an entrepreneur, popularizer and university professor in Marketing and Business Development. He has been following the blockchain world since 2013 and founded his YouTube channel DeFi Talks in 2021. It has reached more than half a million people in more than 100 different countries through its channels in the past year. Today, he is engaged in creating useful educational content and tools to make the world of crypto and DeFi accessible to all.
Alessio Vilmercati is a 22-year-old investor and DeFi enthusiast with a Business and Management degree. In 2022, he obtained his Blockchain Technology & Management certificate at the Blockchain Management School in Rome. Predominantly in the world of DeFi, Alessio devotes himself to reviewing dApps every day, looking for new opportunities every day. As an open supporter of this technology and its future application in the traditional world, DeFi Talks collaborates with the YouTube channel.
Federico Chironi is a 23-year-old trader and DeFi enthusiast with a Business Administration degree; He then chose to continue his education with a Master’s degree in Blockchain Technology and Management at the Blockchain Management School in 2021. He has been studying and investing in the blockchain world, especially in the DeFi sector, since 2020. Decentralized Finance, which will bring it in the coming years, has recently been doing outreach activities on the subject in cooperation with the YouTube channel DeFi Talks.
Luigi Travaglini is a popularizer and technical advisor in the cryptocurrency industry. He intersects with the crypto world between 2014 and 2015, then becomes passionate and never breaks himself off. Combining his academic career with a long technical study in the field of blockchain, he started to provide training and assistance services in 2018.