What is the difference between Liquidity Mining and Yield Farming?

There is sometimes some confusion between the two concepts. It is very often confusing and we wanted to put an end to it even if it is not a dramatic error either. In this article, we will see the difference between the two because there is one. If we want to talk about it, it's because these are certainly the most exciting phenomena in DeFi and they are also fundamental pillars of the new economy.

Of course, DeFi is a universe in itself and a discipline in which we find different financial services. There are lending/borrowing portals, staking services, DEXs, etc. However, it is true that the ones making a lot of noise are the Yield Farming and Liquidity Mining protocols.

This is also what has sparked such enthusiasm for DeFi in general in recent years. For the most critical, they will say that it is just another speculative bubble fueled by FOMO and the great returns announced. Everyone rushes into it without really thinking about the ins and outs.

Indeed, some tokens, sometimes useless, have been “inflated” when they have no other reason to exist than to create immediate profits…

Otherwise, beyond that, there is real financial innovation and it is important to mention it. Anyway, let's skip the introduction and get straight to the point.

Liquidity Mining: Providing liquidity

What we call liquidity mining can be understood as the result of two essential concepts: On the one hand liquidity and on the other hand cryptocurrency mining.

It is above all the concept of liquidity which will make you understand everything that results from it. And this is explained by the fact that it is an essential driving element for the functioning of the famous AMM (Automated Market Maker).

Liquidity is central to operating an exchange platform. Understand that AMMs (Automated Market Makers) need liquidity to operate. As much as centralized platforms operate with "order books" as much on AMMs, it is the liquidity pools that allow this exchange. This is what makes the availability of tokens for purchase and sale. And, this is also the big "lack" of decentralized platforms for example compared to centralized platforms. The latter generally have more liquidity and this is also what attracts more traders. And inexorably, this increases liquidity, etc. The lack of liquidity was therefore the major element that caused decentralized platforms not to have the desired success.

Mining: You think of classic Bitcoin mining for example. This is typically the term associated with Proof-of-work mining in fact. With computing power, we will be able to solve algorithms and mine cryptocurrencies.

So, liquidity mining is a process that results from the combination of mining and liquidity.

This is what aroused the interest of many people and created the exposure of DeFi.

So concretely, when we do liquidity mining, we will become " liquidity provider » and lend its liquidity to a certain pool. Depending on the duration and especially the amount of liquidity that we provide, we will receive new tokens that have just been created. For example, in a platform that does liquidity mining, it will be able to pay and reward the liquidity providers by distributing protocol governance tokens to them, for example. This token is called LP to designate the Liquidity Provider Token.

Thus, this attracts liquidity providers doubly! On the one hand, he will receive commission percentages (often between 0,1 and 0,3%) from swaps between tokens and in addition, he will earn LP tokens which will be created with each new block.

It is in fact this double incentive that has brought so many people into DeFi, as one can imagine.

Now that it is clearer, we can now explain what Yield Farming is.

Yield Farming

Yield Farming is a process that will exploit Liquidity Mining to maximize the yield of participants. There are different ways of doing Yield Farming. For example, Yield Farming can consist of betting on different platforms for example to optimize the yield of these LP tokens. That said, Yield Farming mainly consists of maximizing the yield of these LP tokens via different mechanisms (such as staking for example).

It was clearly the Compound project which launched the machine. Compound distributed governance tokens to participants who used its lending/borrowing protocol. In doing so, they “earned” COMP tokens.

Very quickly, the COMP token increased in value and traders began to speculate on this token. So, other people wanted to use the protocol simply to get COMP and that's how, in retrospect, yield farming was born.

Indeed, as much as liquidity mining represents the fact of providing liquidity to platforms, yield farming consists of “cultivating” (farming) new tokens via this process.

This is also why we confuse the two terms a lot because as a general rule, we do both now.

There you go, now you know the difference between the two 😉

I hope you enjoyed this article and helped you see things more clearly. These are new terms and it's a new type of retribution.

Yield Farming and Liquidity Mining are still at the beginning and it is therefore normal not to fully understand certain concepts 😉

---

Note: No financial advice is given on the zonebitcoin blog. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.

---

To buy cryptocurrencies (simple way):

• Speaking on Binance (Complete crypto trading platform)
• Speaking on Bitpanda (Simple and accessible platform for beginners)

To generate interest on your cryptocurrencies:

• Speaking on Youhodler (Earn up to 12% interest on your cryptos every week)
• Speaking on BlockFI (Generate cumulative interest and receive your earnings every month) 

To secure your cryptocurrencies:

• On the wallet Ledger 
• On the wallet safepal

To have fun and play 

•  The best for Sports Betting with Big Bonuses: CloudBet
• Discover the best bitcoin casino