The essence of Defi mining

DeFi (Decentralized Finance) is decentralized finance. It is a financial service network built on blockchain technology. It aims to eliminate the intermediary links of traditional financial centralized institutions and realize the free flow of funds and the decentralization of financial services. Defi mining is the process of participating in the DeFi network and obtaining token rewards by providing computing power, liquidity, etc.

 Risks of Defi mining

Although Defi mining has attractive high returns, it is also accompanied by certain risks. First, the security of smart contracts is an important issue. There have been many incidents in the past where smart contract vulnerabilities have been exploited, resulting in losses of user funds. Secondly, market volatility risk is also a challenge faced by Defi mining. The sharp fluctuations in token prices may cause a sharp drop in mining income or even losses. In addition, liquidity risk and contract risk also need to be paid attention to.

 Defi mining benefits

Despite certain risks, Defi mining also has considerable benefits. By providing liquidity mining and participating in mining activities of various projects, users can obtain token rewards issued by the project party. At the same time, as the DeFi market continues to grow and develop, the token prices of some projects are also expected to continue to rise, bringing rich benefits to mining participants.

 Defi mining strategies

In view of the risks of Defi mining, users can adopt some strategies to avoid risks and increase returns. First, choose projects with good reputation and high security for mining to avoid capital losses due to problems of the project party. Secondly, diversify investments and don't put all your eggs in one basket to reduce single risks. In addition, timely following market trends and flexibly adjusting investment strategies are also the key to ensuring returns.

 Example analysis

Take the recent popular Defi project YFI as an example. Its token has risen dramatically in a short period of time, attracting a large number of users to participate in mining. However, due to the high risk of the project itself and the large fluctuations in token prices, some investors have suffered losses due to blindly following the trend. This also reminds us that when participating in Defi mining, we must look at the benefits rationally, not be blinded by short-term high returns, and consider long-term investment planning.

 Conclusion

As an emerging field, Defi mining has both attractive high returns and certain risks. When participating in Defi mining, users need to carefully select projects, reasonably diversify investments, and keep up with market trends in a timely manner in order to find a balance between risk and return and achieve the goal of wealth appreciation. I hope that the discussion in this article can help readers better understand Defi mining and make wise investment decisions.

The four most famous international exchanges:

Binance INTL	OKX INTL	Gate.io INTL	Huobi INTL
China Line　APP DL	China Line　APP DL	China Line　APP DL	China Line　APP DL

Note: The above exchange logo is the official website registration link, and the text is the APP download link.

Since last year, DeFi has set off a mining craze in the currency circle, and the DeFi mining craze has not faded until the beginning of this year. Maybe some investors still don’t know much about DeFi mining. In fact, DeFi mining is liquidity mining. Because DeFi mining is currently mainly a product on the Ethereum blockchain, it mainly obtains income by providing liquidity for DeFi products on Ethereum. Simply put, users deposit coins to mine, and they will also use the term Bitcoin mining. Are many investors worried that DeFi mining will lose their principal? Don’t they know that DeFi mining is risky? Let the editor of the currency circle talk about it below.

 Will DeFi mining lose principal?

DeFi mining is likely to lose principal. We have been doing DeFi mining recently. The risks mainly come from three levels. The first is the code level, the front-end code, mainly to see if there are loopholes in the web page and DApp front end. If there are loopholes, we may not be able to log in to the mining product page, and even put our principal at risk.

The second risk at the code level is the smart contract risk. There are many dimensions to consider here. One of the more important dimensions is the authority of the smart contract owner. For example, the two popular projects before were because the owners of the smart contracts had too much authority, which brought more uncertainty and posed a threat to the investors' principal. Therefore, we will participate in some projects that have community audits or even audits by authoritative auditing agencies, and we must ensure that the owner of this smart contract has limited authority, such as adding a time lock.

Another is the risk of business logic and financial logic. You can refer to the recent famous smart contract arbitrage attacks, because there were loopholes at the business logic level, resulting in huge losses.

The third aspect is to recommend friends to participate in some mining with relatively low risks, such as no principal and mortgage of a single currency. If you want to participate in high-risk mining such as 50% token mining, you must calculate the uncompensated loss of tokens, and consider the relationship between potential returns and the uncompensated loss of principal caused by large fluctuations in the currency price.

 Is DeFi mining risky?

DeFi mining is risky, and the main risks are as follows:

1. Smart contract vulnerabilities and hacker attacks

In the DeFi mining ecosystem, smart contract vulnerabilities are inevitable. DeFi protocols such as Yam, YFV, Sushi-Sapp, and Kimchi
Finance were all launched without security audits. Even if they are fully audited, smart contract vulnerabilities still exist.

There are no reports of major losses to DeFi protocols due to hacker attacks, but in the eyes of hackers, each DeFi protocol has a few million dollars or hundreds of millions of dollars, which are all hot cakes in the eyes of hackers. If a hacker attack occurs, all funds in the pledge pool may be reduced to zero.

2. Liquidity mining is not a sure win

In traditional centralized exchanges, everyone who uses contract leverage has a liquidation mechanism. Once a liquidation occurs, it means that your principal is almost gone.

In terms of liquidity mining, there is also a liquidation mechanism. Although it is not as bad as the contract, after the currency price drops rapidly, the liquidator will start the liquidation mechanism, and your principal will be threatened.

3. It is not advisable to take over in the secondary market

Nowadays, the governance tokens are rising wildly, and the threshold for participating in liquidity mining is relatively high. In addition, various centralized exchanges have begun to lay out relevant DeFi zones, which has allowed many novices to enter the secondary market transactions.

In terms of value logic, liquidity mining cannot create liquidity value, but provides liquidity of funds.

The cost for miners to obtain tokens by providing liquidity is relatively low, and the provision of liquidity principal will not be greatly affected, but the returns will fluctuate. Now, most miners also use "mining, withdrawing and selling" as a criterion to ensure the stability of their profits and avoid risks.

However, if token speculation is carried out in the secondary market, the risk is much higher than the risk of liquidity mining. If the token price falls sharply or returns to zero, you may lose all the principal.

The above is the comprehensive answer of the editor of the currency circle to the two questions of whether DeFi mining will lose principal and whether DeFi mining is risky. For DeFi, fund security is mainly to solve the risk of smart contract security. We know that the current market's fund management transactions are all carried out in centralized exchanges, and exchange running away is an inevitable black swan event. If we want to reduce this risk, we can only choose mainstream exchanges with strong solvency, or always pay attention to the exchange's operating conditions and transaction data, and judge whether it is reliable through some precursor information.
In today's digital currency market, DeFi mining has become a hot topic that has attracted much attention. People have different opinions on whether Defi mining will lose the principal and whether there are risks. This article will explore the risks and benefits of Defi mining from different angles and take you to explore the mysteries of this emerging field.