Today’s cryptocurrency and blockchain landscape is subject to constant change. As technology scales and more big-money players get involved, new concepts emerge and old ones become obsolete. It’s imperative to stay on top, so today’s article provides a brief overview of two popular ideas related to the single most popular concept going around – DeFi (Decentralized Finance).

The goal of Exolix is to increase the visibility of liquidity mining and crop farming, and to highlight the stark differences between two of the most misunderstood concepts in the crypto space.

Liquidity Mining: Definition and Pros & Cons

Before comparing and contrasting yield farming vs. liquidity mining, we need to gain a solid understanding of each concept before we see where they overlap and where they diverge.

Liquidity mining is a system or a procedure in which everyone involved contributes crypto to liquidity pools and is eventually rewarded with tokens and fees proportionate to their contribution. The pools contain liquidity in specific trading pairs (ETH and USDT, for instance) which can be accessed on decentralized cryptocurrency exchange platforms (not unlike Exolix!).

Profitable trading on such platforms is made possible by automated market makers and liquidity pools. The latter creates an exchange market for a specific pair of cryptos (once again, ETH and USDT seem to be the best example). A pool member sets the pool’s starting cost/percentage based on market calculations. The goal is to create an analogous balance of both digital assets.

Smart contracts are in charge of all the goings-on within a liquidity pool, meaning that each exchange is made possible by smart contracts and that results in a price adjustment. Once the transactions go through, the processing fees are charged and then divided between all pool members.

Here’s the simplest breakdown of how it works:

1. You add your assets to a liquidity pool. It’s the only mandatory step that you need to take to participate. It’s just like transferring your money from one crypto wallet to another. The above-mentioned ETH/USDT is a very good example of a popular pair that’s commonly found in pools. Even crypto newbies have heard of both ETH and USDT.
2. Liquidity pools accumulate profit and that profit is distributed between all contributors based on the contribution ratio.

Now, let’s break down the biggest pros and cons of this method. The pros include:

• Everyone benefits: Everyone involved stands to benefit from good decision-making, everybody’s financial well-being is at stake.
• Passive income: The money will come in even if you don’t do much.
• Low entry barriers: Minimal deposits are usually on the lower side. Initial profits can be re-invested to gain more leverage.
• Everyone matters: Even the smallest contributors can vote on the decisions that shape the future of the project.

The cons include:

• Rampant scamming: DeFi is currently a trending sector, so of course it’s bound to attract criminals.
• Security issues: Some cryptos are open-source, which creates a risk of hacking and theft.
• Potential losses: The cost of tokens can still decline and you can end up in a state of impermanent loss; you lose nothing until you decide to withdraw.

What Does Yield Farming Mean? The Main Pros & Cons

Before anything else, we need to establish the hierarchy here. First, there existed staking, so yield farming is oftentimes considered a subtype of staking while liquidity mining is considered a subtype of yield farming. The principal difference between yield farming and liquidity mining that everyone points to is that people involved in liquidity mining are rewarded with the platform’s own crypto as well as fee earnings.

In today’s cryptocurrency ecosystem, yield farming is considered the most in-demand method of generating profit from cryptocurrencies. The popularity has everything to do with the straightforward nature of this concept – you just store cryptocurrencies in a liquidity pool and that’s it. It’s similar to how banks use your money to fund loans and other products that rely on fiat currencies in exchange for a fixed reward.

Liquidity pools used for yield farming are digital piles of cryptocurrencies locked in smart contracts. People that provide liquidity to pools are compensated based on their contributions and it’s possible to make more money if you play your cards right. For instance, one of the advanced ways of getting higher yields is switching your digital funds between different protocols.

Let’s examine the pros and cons of this form of passive income. The positives include:

• High yields: It depends heavily on the crypto pair that you choose, but it is possible to make a lot of money if you have enough knowledge to figure out which pair holds the most potential. Double-digit returns are common even when dealing with popular picks like ETH and USDT.
• Flexibility: There is no fixed duration that your assets need to be held in the pools. You can withdraw if you are feeling uncomfortable or if you have better things to do with your funds.
• An easy-to-understand mechanism: Assets are secured into a smart contract-based pool for trading, lending, etc. Assets come in the form of a pair of tokens in which the second one usually being ETH or a pegged coin like USDT.

Of course, there are downsides as well:

• Price fluctuations: It is possible to lose money if the crypto price of your assets depreciates or if you haven’t properly planned to make a long-term investment.
• Rug pulls and other scams: The cryptocurrency world is yet to get rid of scam artists – cheats actively targeting people who want to invest.
• Possible regulatory issues: In case the Securities and Exchange Commission (SEC) classifies DeFi-based lending and borrowing as securities, the ramifications could lead to a disaster for investors.

Key Differences Outlined

Here’s an outline to highlight the key differences between yield farming and liquidity mining:

We hope that the above has helped you gain a more comprehensive understanding of all the yield farming vs. liquidity pool differences. The bottom line is that as far as the main goals go, yield farming is the one that offers the biggest possible returns. Liquidity mining is geared more toward boosting the liquidity of a DeFi protocol. Yield farming vs. liquidity providing indeed is a complex situation, but additional information can be easily found online.

Remember that doing your own research is the most important thing when it comes to settling on the proper financial tool for your needs! Don’t blindly listen to an expert’s opinion or advice on how to maximize your profit. The ultimate guide to optimizing your cryptocurrency investment is following your own path and doing your own homework.

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• Source: Plato Data Intelligence: PlatoData.io