What does the maximum liquidity mining limit mean (Illustration of liquidity mining principles)?

08/18/2023 11:18 • AI Insights • 57 views

What does the maximum liquidity mining limit mean? When using Uniswap on Ethereum, liquidity for ETH can be provided to any Ethereum miner who wants to trade. However, due to the lack of restrictions, the mining pools can only receive rewards from these contracts and they cannot control their total funds.

If a DeFi protocol can implement its governance and incentive measures, then a maximum liquidity mining limit needs to be set. According to information released by Uniswap, currently there are over 3 million user addresses holding assets worth at least $10,000 (including LP tokens and ETH on Uniswap), but only about 500 liquidity providers have this amount.

Illustration of Liquidity Mining Principles

In this article, we will introduce the principles and mechanisms of liquidity mining.

First, let us understand what liquidity mining is. What is its purpose? How does it work? What operations can it be used for? How does it accomplish its work? Can it enable people to participate? What problems may arise if it is not done this way?

Here, the concept of liquidity forms the basis. What is liquidity mining? It has two forms: one is a bet on asset prices, and the other is a bet on market value.

In the first case, when a currency is in a downward trend, it will reach a low point and then start to rise, causing the token price to rise and reach a high level. The second case represents to some extent the appreciation or depreciation of a particular cryptocurrency, such as sudden price spikes or significant fluctuations on certain exchanges or platforms.”

The third case is even more serious, which means that since there are no underlying assets in the market that can provide such liquidity and incentives, most people believe that the prices of cryptocurrencies like Bitcoin will continue to rise to historic highs. Therefore, this statement seems to be unfounded. However, in fact, although Bitcoin is currently experiencing a bull market, its increase is very small. As the market recovers, its performance is becoming more and more outstanding. So why do these situations occur? Because there are currently many investment funds and various investment tools related to Bitcoin that are in a loss state, investors do not see the value of the Bitcoins they hold being locked in their asset portfolios for a long time.

Based on data from Coinmarketcap, as of June 9th, BTC is quoted at $5,637.37 (-2.03%). ETH is quoted at $390.15 (+1.44%).

From the two graphs above, after consolidating around $10,000 for over a year, BTC finally broke through the previous high support level and successfully reached a new high and exceeded its previous high position.

Next, let’s take a look at some of the other works in the following two images:

StaniKulechov, the founder of AAVE, recently published an article “DeFi: A Financial Model,” in which he pointed out that with the help of DeFi protocols, users can transfer funds between DeFi platforms. Additionally, they can also utilize smart contracts to automatically execute any number of collateral items to earn interest.

Of course, many projects are using smart contracts to create decentralized applications. For example, Uniswap and Balancer are both generated through liquidity mining. Some will be generated by providing liquidity, and the rest will be distributed to those who wish to receive rewards.

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What does the maximum liquidity mining limit mean (Illustration of liquidity mining principles)?

Illustration of Liquidity Mining Principles

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