In this article we answer the 7 most frequently asked questions about Liquidity Mining on DeFiChain:
- Where do the Liquidity Mining Rewards come from?
- How can 100% APY and more not be a scam?
- Why do I sometimes lose Bitcoin/Ethereum/other coins?
- What is the best pool to do Liquidity Mining?
- Where can I buy/sell DFI?
- What are the minimum requirements for liquidity mining?
- Why do I need to provide both sides of the pool?
Where do the Liquidity Mining Rewards come from?
The Liquidity Mining Rewards consist mostly of Blockchain Rewards and to a small extent of transaction costs that are incurred when using the DEX and are paid out to the Liquidity Miners.
Blockchain Rewards are that portion of DFI Coins 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 as follows:
- 135 DFI as Mining Rewards for Masternodes
- 45 DFI go to the DeFi Incentive Funding smart contract
- 19.9 DFI go to the Community Fund
- 0.1 DFI go to the Bitcoin Anchor Reward smart contract
The hard cap is 1.2 billion DFI, which is the maximum that can ever exist.
How can 100% APY and more not be a scam?
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.
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:
- 80 DFI per block for the BTC-DFI Pool
- 15 DFI per block for the ETH-DFI Pool
- 5 DFI per block for the USDT-DFI Pool
- 2 DFI per block for the LTC-DFI Pool
- 1 DFI per block for the BCH-DFI Pool
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.
Why do I sometimes lose Bitcoin/Ethereum/other coins?
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: https://julianhosp.com/impermanent-loss-other-liquidity-mining-risks-explained/
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 is the best pool to do Liquidity Mining?
What the best pool for you to do liquidity mining is depends on different factors, such as:
- Which coins do you already hold / in which coins do you believe in the long term?
- How do you think the coins of the liquidity pool develop in relation to each other (important for the impermanent loss, which is explained in the question "Why are my Bitcoin/Ethereum/other coins getting less?")
- What is the APY of the liquidity pool?
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.
Where can I buy/sell DFI?
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:
- Via centralized exchange (CEX)
- Via a decentralized exchange (DEX)
- And via DeFiChain's trusted partner Cake DeFi, which however only offers buying and liquidity mining, not selling.
All 3 ways are explained in detail in this article:
What are the minimum requirements for liquidity mining?
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
Do I need to provide both sides of the pool and why?
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 DeFiChain Reddit Community and leave us your feedback!
And if you don't use DeFiChain yet, you can download the DeFi Wallet here.