Liquidity mining and it's working

When I talk about in layman language which is in traditional finance liquidity is defined as the extent of easiness in which a particular token can be buy without significant rice movement and in the context of decentralized finance I have already explained about liquidity.

When I talk about decentralized exchanges then these exchanges permits users to trade cryptocurrency in our direct way without any need of intermediate things in between and for the smooth functioning of exchange is liquidity is very significant thing because responsible for giving surety that there are many numbers and enough numbers of tokens are available for trading.

Second name that we can use for liquidity mining is yield farming and it is important in the insectivisation of users for providing liquidity to these decentralized exchanges or liquidity pools. After that users earn reward also in the form of additional tokens which is beneficial for users.

When I come about working of liquid mining then it works in the following ways as I'm explaining in the steps.

Selecting a Liquidity Pool

First of all there is a need to select one of the most particular liquid at a decentralized exchange because its very significant when you want to provide liquidity and when I talk about liquidity rules then these are basically pairs of tokens like BTC/USDT and users show their contribution by an equal value of both tokens to pool.

Depositing Funds

When I talk about deposition of funds then users deposit equal amount of into liquidity pool and if I give an example then you can say that if I user wants to provide liquidity for BTC/USDT pool then they would deposit and equal amount and equal value of BTC and USDT both.

Receiving Liquidity Pool Tokens

I have already talked about it that users also receive reward in return for providing liquidity in the form of liquidity pool tokens. I can give an example by saying that if I user is depositing 10% of total liquidity in pool then he would receive at the end 10% of the liquidity pool tokens so its an advantage for user.

Earning Rewards

When a user hold liquidity pool tokens then rewards can be earned by user and these rewards come in the form of additional token from the overall protocol or share of trading fees generated by the decentralized exchange. According to the protocol specific rewards and mechanism for the distribution of reward in users may change.

Risks and Considerations:

Now there could be some risks and considerations also associated with the liquid mining. To consider risk is very important and value of tokens in liquidity pool can also show fluctuations so it also affect overall value of holding of users. There can be some risk associated with the specific decentralized exchange and liquidity pool like small contract vulnerability or losses for short term.