What is Yield Farming / Liquidity Mining
In many cases, the two concepts of yield farming and liquidity mining often need clarification. Indeed, in a broad sense, both concepts refer to the process of obtaining passive income by providing liquidity to DeFi (decentralized finance) protocols. But there are also subtle differences between them, and understanding these differences can help us grasp the two concepts more accurately.
To better understand them, here's a suggestion that we introduce another fundamental concept, "staking," mentioned in the previous chapter, for comparison and understanding. The following are the basic definitions of these three concepts:
- Staking refers to the process of locking the native assets of a blockchain that uses the PoS (Proof-of-Stake) consensus mechanism within a certain period to help maintain the operation of the blockchain and earn corresponding returns.
- Yield farming refers to a way for people to earn passive income by providing liquidity to DeFi liquidity pools or collateral pools, that is, "crypto deposits." In short, users lock their assets into a DeFi protocol, and in exchange for this locking, the DeFi protocol automatically pays these "Farmers" cryptocurrency rewards over a period of time.
- Liquidity mining is to provide crypto assets to a liquidity pool, then obtain fees and cryptocurrency rewards according to their proportion in the pool. Liquidity mining is a form of income farming. Still, liquidity mining occurs in a more subdivided field, DEX (decentralized exchange) based on AMM (automatic market maker) and liquidity pool.
It is not difficult to see that the main difference between the three lies in the scenario and motivation: as the core element of many blockchain consensus mechanisms, staking generally exists in various scenarios, and in general, compared to obtaining passive income, stakers are more inclined to want to maintain the security of the network; yield farming occurs in DeFi protocols, and farmers focus on revenue, that is, the pursuit of a higher APY (annual percentage yield); and when this investment strategy is specific to the category of AMM DEXes, it's therefore called liquidity mining.
Of course, the relationship between the three is more complex than shown in the chart. The above chart is to provide an intuitive relationship display.
If you want to learn more about yield farming, please check “What is yearn.finance”.
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