In this article we answer the 7 most frequently asked questions about Liquidity Mining:
The Liquidity Mining Rewards consist mostly of Blockchain Rewards of the DeFiChain and to a small extent of transaction costs that are incurred when using the Decentralized Exchange and are paid out to the Liquidity Miners.
Blockchain Rewards are that portion of DFI Coins – the native coin of the DeFiChain – that are newly distributed per block. This is similar to Bitcoin mining, where miners are rewarded with a certain number of BTC per block. DeFiChain is a hybrid proof-of-work & proof-of-stake blockchain where the number of coins per block gets smaller and smaller in the long run. This makes DFI, like Bitcoin, deflationary.
No additional DFI coins are issued through liquidity mining.
As mentioned, the coins come from blockchain rewards. To be able to introduce this, the majority of stakers in the DeFiChain Improvement Proposal #2 and DFIP #3 voted to give a portion of their staking rewards to the liquidity miners.
A DFIP refers to a proposal that is submitted by the community and either accepted or rejected by stakers.
The current allocation per block is:
The hard cap is 1.2 billion DFI, which is the maximum that can ever exist.
As answered in detail in the question "Where do the Liquidity Mining Rewards come from?", the Liquidity Mining Rewards are for the most part Blockchain Rewards of DeFiChain.
This means that a decentrally voted for amount of DFI per block is distributed to the respective liquidity pools. Currently, 103 DFI per block are distributed to five pools.
Currently, the specific pool rewards allocation is as follows:
The block rewards are always distributed to the different pools in equal proportions per block. A change in the APY can therefore only result from an inflow or outflow of capital.
If more capital enters a pool, the APY decreases, since the rewards become smaller in relation.
A simple example to clarify what is meant by "in relation": 80 DFI out of 800 DFI is 10%, 80 DFI out of 8000 DFI is only 1%.
On the other hand, when capital flows out of a pool, the APY increases.
So pool returns fluctuate with the inflow and outflow of new capital.
In general, you should expect that the rewards of your liquidity pool are not constant and are likely to get lower over time as more new capital is likely to flow in than out. On the other hand, with a new pool launch, you can expect the APY to be very high at the beginning.
By far your biggest risk in liquidity mining is the impermanent loss.
This occurs especially with strong, one-sided pair fluctuations and large swaps, as the pool becomes unbalanced.
A detailed explanation of what Impermanent Loss is and how it works can be found here:
In general, however, it can be said that the Impermanent Loss is negligible given the current returns and average market fluctuations.
So if you're wondering why you suddenly see a tiny bit less BTC / ETH / another coin in your wallet, you should check again how much DFI have been added. Most of the time, the rewards clearly outweigh the impermanent loss.
What the best pool for you to do liquidity mining is depends on different factors, such as:
So you see: There is no universal answer for which liquidity pool you should choose. It all depends on you and your personal preferences.
If you are unsure, you certainly won't go wrong with the largest and most popular pool BTC-DFI, because with Bitcoin you hold a very solid coin that historically has performed similarly to the counterpart pair DFI and thus has a high correlation.
If you are already Liquidity Mining via the DeFiChain Wallet, the easiest and most direct way is of course to swap via the DEX (Decentralized Exchange) integrated in the Wallet.
In general, however, there are 3 ways to buy/sell DFI:
All 3 ways are explained in detail in this article:
There are no minimum requirements for Liquidity Mining itself. You only need both coins of a pool pair and can start immediately without any minimum!
If you want to run Liquidity Mining via the DeFiChain Wallet, you need a computer that meets the minimum requirements for the app. You can always find these minimum requirements here:
If your device does not meet the minimum requirements for the DeFiChain Wallet, you can still do Liquidity Mining: Centralized via the platform of DeFiChain's trusted partner Cake DeFi. Please note that unlike DeFiChain, Cake requires you to verify your identity and trust a third party, namely the Singapore-regulated company Cake DeFi.
Learn more about the differences between Cake & DeFiChain in this video: https://www.youtube.com/watch?v=TerkYPyg5uc
Yes, you need to provide both sides of a liquidity pool.
This way, liquidity is always provided not only in one direction, but in both directions: The buying and the selling.
Adding liquidity to only one coin would also lead to a consistently high imbalance of the pools, which would negatively impact prices on DEX, cause high impermanent loss and thus be detrimental to everyone involved, both liquidity miners and regular users (swappers).
Were all your questions answered satisfactorily or do you still have open questions?
In both cases you are cordially invited to join the official Cake DeFi Telegram group and discuss with the community!