LiquidED #1: Intro to Liquidity Mining on Liquid Driver
Welcome to the first release of the Liquid Driver Educational series, LiquidED. This educational series introduces you to the opportunities and benefits that Liquid Driver provides and successfully onboard you to easily navigate through the features and enjoy a rewarding DeFi experience.
So let’s jump right into LiquidED #1: Introduction to Liquidity Mining on Liquid Driver.
“Liquidity mining” — another buzzword?. To fully understand the concept of liquidity mining, we will first need to understand what liquidity pools are all about. In Decentralized Finance (DeFi), liquidity pools (LP) are a pool of tokens or crypto assets that users lock up in a smart contract.
As a user, locking up your funds in a liquidity pool provides the needed liquidity for assets on decentralized exchanges (DEXs) and money markets, which helps facilitate various operations such as asset swapping, borrowing, and lending on DeFi platforms.
A single liquidity pool contains two tokens, which creates a new market for those tokens. LQDR/FTM is an excellent example of a liquidity pool on LiquidDriver.
A liquidity provider (LP) is anyone who provides any amount of a pair of tokens into the pool and is incentivized or rewarded with a special token called LP tokens in proportion to the amount of liquidity they supplied to the pool. Now that we understand what liquidity pools are, let’s dive into the central concept of this article.
What is liquidity mining?
Liquidity mining is simply the process by which users of DeFi platforms put their assets into the liquidity pool and earn additional tokens as rewards on top of the expected yield. So basically, all the users who participate in liquidity mining put their assets into the liquidity pool and, in return, earn additional tokens alongside typical yield coming from these DeFi platforms.
Note that these rewards are different from the rewards coming from staking. Users who participate in liquidity mining will gain rewards represented by the project’s native token, which is the LQDR token in our case.
How does liquidity mining work?
When users put their assets into an LP, they are eligible to earn the native token from the transaction fees of that DeFi platform. The revenue from liquidity pools comes from the transaction fees end-users pay for using the platform to borrow, lend, and swap coins.
This revenue is then redistributed to all the liquidity providers according to the proportion of the liquidity they provided. In our Farms UI, this is represented by “Trading Fee APR.”
Because the mining pool only accepts the listed LP tokens, you will need to have the LP tokens in your wallet to participate in liquidity mining. For example, LQDR-FTM mining pools only accept LQDR-FTM from SpiritSwap. When you participate in the liquidity mining of this pool, you will receive the LQDR token as a reward.
Currently, the Annual Percentage Return (APR) from this market on LQDR is at 220%.
Benefits of Liquidity Mining
Since one of the primary goals of decentralized exchanges is to be liquid, they will reward anyone looking to provide liquidity to their platform. In some DeFi protocols, a liquidity miner can be rewarded with the governance token in addition to the trading fees that accrue in their LP tokens. This governance token helps LP providers contribute to the project’s development by voting to help improve the platform’s protocol.
Risks Involved in Liquidity Mining
The most critical risk involved with liquidity mining is Impermanent Loss. This is one of the risks that assets are exposed to when they are in a liquidity pool. It usually occurs when the price of token A increases relative to asset B in an LP.
The bigger the difference, the more your assets are exposed to impermanent loss. The loss can be reversible if the prices of the assets return to their initial prices.
If the assets are removed from the LP before the prices return to the original price ratio between the two assets, the loss becomes permanent. Users can calculate the loss from the difference in the tokens’ value in the liquidity pool versus the value of just holding them.
However, if you deposited into the ETH/FTM pool when ETH = $500 and FTM = $1, you’ll have 0 impermanent loss if you withdraw when ETH = $1000 and FTM = $2.
How Impermanent Loss Happens
When providing liquidity in a liquidity pool, you will have to provide the same value for each asset in the pool. For example, you put $100 of LQDR and $100 of FTM in an LQDR-FTM pair. You then receive an LP token that corresponds to the amount of liquidity you provided. The LP tokens also serve as a receipt showing you are entitled to a certain pool percentage.
For example: if you provided $200 worth of assets to a pool, bringing it up to $1000, you are entitled to 20% of the pool. If other users add to this pool, bringing the pool to say $2000, you will be entitled to only about 10% of the pool.
For the assets in the pool to be balanced, there is a risk involved — the risk of impermanent loss. So, an LQDR/FTM pool with a value of $2 million will require the provision of $1 million of LQDR and $1 million worth of FTM into the pool to remain balanced.
As users trade in the pool, they will have to provide the same value for each asset for the LP to maintain a 50/50 balance between each asset. However, the LP may be unbalanced when compared to external price feeds. Impermanent loss comes in when users withdraw from the pool after the price ratio between the two assets changes.
Essentially, they will receive more of the asset in the pool that is decreasing in price, resulting in a lower total balance (valued in $), compared to if they were simply hodling each asset in their wallet.
Apart from the impermanent loss, the other risks involved in liquidity mining are:
- Smart Contract Risks: This, of course, refers to when there is a bug in the smart contract, which can lead to exploitation of the funds that have been put into the Liquidity Pool.
- Project Risks: These are risks that may arise from the project. Users should ask questions about potential backdoors, whether the project has been independently audited, and open-sourced code. That way, liquidity providers will know if their funds are safe or if they will be open to exploitation.
How to start liquidity mining on a Defi Platform
- Launch the DeFi Platform.
- Navigate to liquidity.
- Decide which of the liquidity pool pairs you’d want to supply.
- Connect your wallet.
- Add your liquidity to the pools.
- Check your Liquidity.
Liquidity Mining with Liquid Driver
Liquid Driver is the first-ever liquidity-mining dApp on Fantom, where you can stake your LP tokens from either SpiritSwap, SpookySwap, or WakaFinance to earn LQDR. You can provide liquidity and farm on any of these DeFi platforms to earn LQDR tokens.
How to Participate in Liquidity Mining on Liquid driver
- Access LiquidDriver through this link https://www.liquiddriver.finance/
- Click on “Farms” on the sidebar menu.
3. You can then see the different market pairs where you can participate by providing liquidity. You can stake LP tokens from SpiritSwap, Spookyswap, or WakaFinance and earn Liquid Driver’s native token LQDR.
Available Market Pairs on SpiritSwap
- LQDR/FTM
- LQDR/SPIRIT
- FTM/fUSDT
- FTM/USDC
- MIM/FTM
- SUSHI/FTM
- LINK/FTM
4. Scroll down to see other available markets where you can participate in providing liquidity.
Available market pairs from SpookySwap
- BOO/FTM
- USDC/FTM
- DAI/FTM
- SUSHI/FTM
- LINK/FTM
- wETH/FTM
- fUSDT/FTM
- MIM/FTM
5. Scroll further down to see the last available market pairs that Liquid Driver supports…
The available market pairs on Waka Territory
- WAKA/FTM
- FTM/WBTC
- FTM/USDC
6. After choosing your desired market, next is to click on “Provide Liquidity.”
7. This will redirect you to the platforms where these market pairs are provided, and you can then add the desired amount of the market pairs you want to provide
- When Providing Liquidity from SpiritSwap, input the desired amount for the pairs you are providing LP for and then click “Unlock Wallet” to connect your wallet to SpiritSwap.
- To provide liquidity from SpookySwap, click on the “Provide Liquidity” for your desired market on the Liquid Driver site, and it will redirect you to SpookySwap, where you’d need to provide the desired amount for the market pairs.
- Don’t forget to click on “Connect Wallet” to connect your wallet so you can be able to provide your assets to the pools.
- You can also do the same thing to provide liquidity for the market pairs you have chosen from the Waka Territory platform.
- On the WakaFinance platform, you will have to connect your wallet first and select the Fantom network to provide liquidity for pairs in Waka Territory.
- After you have inserted the desired amount for the market pairs you have chosen, click on “connect wallet” to connect your wallet. You can then add the assets to the liquidity pool from the platforms listed above that Liquid Driver supports.
Make sure to check out our Docs if you would like to learn more about our protocol, and head directly to our Discord to get help from the team. We’ve got more in-depth topics to cover, so stay tuned for the next post in the LiquidED series coming your way!
Our channels
Come onboard the ship and become a part of the crew! We share the latest updates on everything LQDR in the channels below. Our community channels are also open for questions, suggestions, and help from the team.
Twitter: twitter.com/LiquidDriver
Discord: discord.gg/jMyffdRmTz
Telegram: t.co/HK0osVDNRp?amp=1
