What is Liquidity mining / Liquid Pool? How Does it Walk?

Liquidity mining or pool is the form by which crypto assets are deposited into a blockchain smart contract for additional yield generation, they are classified as Defi yield generators this allows users of the network to earn passive income after the desired amount of assets are deposited into a particular pool for a given time or period on a decentralized application.

Most Protocols on the blockchain autonomously make decisions before a secondary asset is chosen to merge with the primary asset. Two different assets are required to be deposited into a pool eg, USDT/BTC, and BTC/ETH, some projects provide a variety of assets. 

The liquid pool tokens are based on different smart contracts thereby users are required to send or deposit their assets of choice in the pool to merge a particular trading pair, a certain amount of charges are taken which can be said to be a gas fee, thereafter users receives the generated yield of the merge asset on the pool, additionally, the charges taken as gas fees are partially distributed to liquidity providers as an additional interest. The interest generated is calculated depending on the Total Value Locked (TLV) and thereby the Annual Percentage Yield is set high at most for first come first serve or might depend on how much (APY) the developers choose to offer.

The Risk Factors 

There are two major risk factors.

1), price liquidation, is one of the risks involved in a liquid pool whereby the price of a particular merge token falls short due to bad market conditions or a quick sell-off by a large token holder also cryptocurrencies are volatile assets, tokens locked for a longer period are more exposed to this kind of risk or exchange lose.

2) Hacking, is another major issue faced by liquidity providers due to bad actors who hack pools by reprogramming the source code, most protocols’ source codes are made open and may lead to vulnerability therefore manipulation creates camouflage easily for manipulation.

Preventable matures.

Regarding hacks, the risk is inferior to open-source protocols, whereby Individuals are allowed to test the code or suggest a secured program, most projects spend a good amount on product auditings. And audit results are then published to the community. On the other hand, it is advisable to split your eggs into different baskets to prevent any of the factors listed above.

The blockchain ecosystem is in constant development, new mechanisms are being developed for a better and safer way for investors to be secure by establishing fixed yield positions with reduced risk and comprehensible exposure.