DeFi Liquidity Mining allows you to generate passive income: what is it about?

There is always a before and an after: Michael Jordan, Albert Einstein, Breton Woods, people and moments that have changed history.

August 2020: this was the crucial junction for the world of cryptocurrencies. A month that for some meant triple-digit percentage gains, but for all it represented definitive proof that the blockchain is not a fad, but a technology that is here to stay and change the world of finance.

At the time, the market was suddenly filled with an unprecedented wave of euphoria, any new asset immediately skyrocketing.

Was the DeFi Summerso renamed because what had long been just a promise was finally becoming reality: financial services had landed in the cryptocurrency world. Mind you, the tools available at the time were still primordial, but for the first time the “buy, forget and hope the price grows” model gave way to something new and closer to the dynamics of traditional finance.

In fact, DeFi introduces the possibility of renting out one’s cryptocurrencies, and of making them “work” as if we were a bank.

You must know that traditional finance moves quadrillions of dollars every year, numbers so large that it is hard to count the zeros, and at each passage a small slice ends up in the pockets of a handful of institutions and qualified companies… or, if you prefer, “privileged.” The goal of DeFi is to change this paradigm by making finance an accessible space in which everyone in their own small way can make a part of this big cake their own.

There are many ways to do this, and in the coming weeks we will explore them all; But today I want to introduce you to what is technically referred to as “liquidity mining,” literally “undermining liquidity.”

It must be understood that liquidity is one of the fundamental pillars of any financial instrument, if not the “conditio sine qua non” underlying any transaction. Whether you want to sell a property, gold, or shares, what you need is someone ready to offer you cash: the more easily an asset is sold, the more liquid it is defined. Liquidity is therefore that characteristic which allows us to switch from one asset to another in the shortest time and at the lowest possible cost.

The problem is that if in traditional markets, liquidity is produced by financial operators who bring supply and demand into contact. How to do in a decentralized world where there are no intermediaries?

For this was born the liquidity mining, which attracts liquidity by promising passive income in exchange – often also very generous – obtained thanks to the redistribution of commissions collected and the introduction of further incentives. Ad hoc remuneration programs are, in fact, a rather common practice among DeFi applications: on the one hand they serve to make the returns more attractive and on the other to create an incentive large enough to offset the risks.

You must always remember that incurring losses, sometimes even huge ones, is a possible eventuality; we are talking about a world that is still very young, albeit in very rapid evolution. For this reason, before hunting for passive income in DeFi, it is always good to have a precise strategy, and awareness of what you are doing.

We’ll stop here for today, we don’t want to bore you or overwhelm you with information: there will be a way to go into details in the future. The key information to be drawn from this article is that DeFi introduced finance to the cryptocurrency world, giving us the ability to generate passive income, and providing liquidity is the most popular method of doing so. More than two years have passed since that fateful summer, and technology has never stopped growing, but we should not forget that we are still in an experimental phase, not without risks and which requires the right precautions.