In today's financial markets, it is critical to understand the combinable benefits and risks of liquidity mining. As markets continue to change and financial instruments become increasingly complex, investors need to have a deep understanding of this area in order to maximize returns and minimize potential risks. This article will delve into the concept of liquidity mining, reveal the opportunities and challenges, and take you to explore this dynamic and potential investment field.

 The essence of liquidity mining

Liquidity mining refers to the strategy of exploiting illiquidity or mismatches in the market to find profits. Investors can gain from the spread by buying low-liquid assets and waiting to sell them when market liquidity increases. This strategy requires investors to have strong market insight and risk management capabilities to cope with market fluctuations and uncertainties.

 Opportunities for combinable returns

In liquidity mining, combinable income is one of the most pursued goals by investors. By skillfully combining various assets, investors can maximize returns. For example, an investment fund can invest in stocks, bonds and commodities simultaneously, reducing risk through diversification while taking advantage of the volatility of different asset classes to obtain more stable and consistent returns.

 The criticality of risk management

However, with the benefits come risks. In liquidity mining, investors need to always be alert to market changes and adjust investment portfolios in a timely manner to reduce risks and protect investment principal. For example, when market liquidity drops sharply, investors should close their positions promptly to avoid further losses, which requires investors to have the ability to respond quickly and make decisive decisions.

 Empirical research support

According to past empirical research, liquidity mining strategies perform well under certain conditions. For example, one study found that in situations of high market volatility and low liquidity, liquidity mining strategies tend to have higher returns than the market average. This provides investors with an important reference, indicating that liquidity mining has good profit potential in specific market environments.

 Innovation Insights

In addition to traditional liquidity mining strategies, some innovative methods are also emerging. For example, some quantitative investment funds use big data and artificial intelligence technology to mine liquidity mismatches in the market by analyzing massive data to maximize returns. This innovative approach provides investors with more options, but also creates new challenges and risks.

 Conclusion

In today's financial markets, which are full of challenges and opportunities, it is crucial to understand the combinable benefits and risks of liquidity mining. Investors need to constantly learn and adapt to market changes while maintaining caution and a cool head. Through in-depth research and flexible use of various strategies, investors can obtain generous returns in the field of liquidity mining and achieve a win-win situation of wealth appreciation and risk management. May you become more proficient in your investment journey and gain full profits and wisdom!

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Since Compound launched liquidity mining on June 15, DeFi has been thoroughly activated and ignited the enthusiasm of the crypto community. From the amount of locked assets, the number of users to the trading volume, etc., a qualitative leap has been achieved. From June 15 to July 23, in just over a month, DeFi has grown comprehensively and at an extremely fast speed.

Locked assets

In just over a month, the amount of locked assets has increased from US$1.1 billion to US$3.35 billion, an increase of more than 300%.

(The total amount of locked assets in DeFi exceeds 3.3 billion, SOURCE: DEFIPULSE)

Users

In just over a month, the number of users has increased from 205.011 to 262.179. An increase of more than 27%;

(The total number of DeFi users has grown rapidly, SOURCE: DUNEANALYTICS)

Trading volume

In just the past week, the DEX trading volume exceeded US$1 billion, exceeding the entire year of last year.

(DEX's trading volume exceeded $1 billion in the last 7 days, SOURCE: DUNEANALYTICS)

DEX has officially become a substantial rival to CEX.

These are just one aspect of DeFi's development, and there are more DeFi protocols on the way.

Main protocols for liquidity mining

The main DeFi protocols that currently provide liquidity mining are Balancer, Compound, Curve, Yearn, mStable, Synthetix, Uniswap, etc. Through these protocols, you can mine BAL, COMP, CRV, FYI, MTA, SNX and other tokens; not only that, as a liquidity provider, you can also earn fees.

The current mining pools mainly occur on Curve, Balancer, Compound and Uniswap. On Curve
and Balancer, you can not only mine your own tokens CRV and BAL, but also mine tokens of other protocols, such as YFI, MTA, SNX, etc. These token pools mainly include:

sBTC pool on Curve

Providing liquidity for the sBTC pool can earn SNX, CRV, BAL and REN, but the current yield has dropped a lot. At the time of writing the Blue Fox Notes, its APY is only 1.98%, SNX/REN yield is 8.23%, and BAL yield is only 1.98%.

sUSD pool on Curve

Provide liquidity for the sUSD pool, you can earn SNX and CRV. At the time of writing this article, its APY is 11.78%, and the SNX yield is 30.46%;

Y pool on Curve

Provide liquidity for the Y pool, you can earn YFI and CRV. At the time of writing this article, its APY is 5.35%, but the YFI yield reaches 446.12%;

(Liquidity pool on Curve, SOURCE: CURVE)

In addition to the liquidity pool on Curve, there are also many liquidity pools on Balancer:

mUSD-USDC pool on Balancer

Provide liquidity for mUSD, you can earn MTA and BAL.

(USDC-mUSD liquidity pool on Balancer, SOURCE: Balancer)

mUSD-WETH pool on Balancer

Provide liquidity for mUSD, you can earn MTA and BAL.

(WETH-mUSD liquidity pool on Balancer, SOURCE: Balancer)

mUSD-MTA pool on Balancer

Provide liquidity for mUSD and MTA, earn MTA and BAL.

(MTA-mUSD liquidity pool on Balancer, SOURCE: Balancer)

YFI-DAI pool on Balancer

Provide liquidity for YFI, earn YFI and BAL.

(YFI-DAI liquidity pool on Balancer, SOURCE: Balancer)

iETH pool on Synthetix

SNX token rewards can be obtained by staking iETH on Synthetix.

There are more liquidity mining...

However, due to the composability and permissionlessness of DeFi, liquidity mining is also composable, which also leads to the extreme returns of DeFi mining, but also with extremely high risks.

Liquidity mining and DeFi composability bring extremely high returns

Due to the composability of DeFi protocols, users can earn returns through different protocols. For example, users can deposit stablecoins into Curve's Y pool to earn CRV and YFI token income and fees; after depositing stablecoins in Curve, liquidity tokens are generated to represent the user's share, and the liquidity share tokens can be deposited into Balancer's liquidity pool to earn BAL token income and fees; then the liquidity tokens can be pledged on yearn.finance to earn YFI tokens.

In this way, liquidity providers can earn three tokens at the same time, YFI, CRV, and BAL. In addition, since it provides liquidity for yPool, yearn.finance adjusts according to the best returns of lending protocols such as Compound and Aave, and can also earn the maximum interest income for liquidity providers.

There are even crazier ways to play. Some people first borrow stablecoins with crypto assets such as ETH on lending platforms Compound or Aave, with an interest rate of about 4.6%, and then exchange USDC for SNX on DEX, and pledge SNX on the Synthetix platform to mine sUSD, and then buy more SNX with sUSD, re-pledge SNX, and mine more sUSD.

Then the generated sUSD is used for liquidity mining in Curve's y pool, and the mined YFI is deposited into Balancer's YFI-
DAI pool, so that SNX, CRV, YFI and BAL can be earned. Its annualized income is much higher than the interest on the original loan.

Of course, this may not be the optimal strategy, because its income fluctuates with the fluctuations in the prices of different tokens and the changes in the participation share.

Everything looks good, right? However, it is accompanied by high risks.

The composability of liquidity mining and DeFi also brings extremely high risks

The above operations seem to have very high returns, but there are also high risks behind the high returns. Through the composability of DeFi protocols, it is indeed possible to earn super high returns, but it can be combined not only with returns, but also with risks. Borrowed assets may be at risk of being liquidated. In addition, there are also smart contract risks, impermanent losses, oracle risks, etc. when pledging or providing liquidity on various smart contract platforms. Therefore, when providing liquidity or staking for DeFi, you must pay attention to risks and control them within an acceptable range. Black swans are not common, but once they appear, they are huge losses.