The term liquidity mining It comes because it is the injection of liquidity. This injection of liquidity by investors allows them to “mine governance tokens” that are delivered to those who participate in the system. It is, let’s say, the mining mechanism of that platform, and it is again very related to the concept of staking. Before diving into liquidity mining, it’s crucial to grasp the concept of liquidity in financial markets. In simple terms, liquidity refers to the ease with which an asset can be bought or sold without affecting its market price.
Consequently, DeFi platforms might also offer additional financial perks to draw more funding to their system. Liquidity tends to draw in even more liquidity, much like centralized exchanges. They decide to transfer the entire crypto A funds into the liquidity pool of the exchange platform. After a few weeks, crypto A appreciated in price significantly; however, investor X was not able to capitalise on this appreciation, as their entire crypto A assets are locked in the liquidity pool. Aside from an equal distribution of rewards to investors, liquidity mining has minimal barriers to entry, making it an ideal investment approach that can be beneficial to anyone.
On top of trading fees, you can get native BAL tokens to further your returns. First of which is the difference between providing and mining liquidity. If you deposit crypto in a pair, you earn a shared fee other users pay to swap tokens within this pair.
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