Liquidity mining has become a popular way for crypto users to generate returns by contributing assets to trading pools. This guide dives into the core mechanics, risks, and rewards of liquidity mining—particularly within platforms utilizing automated market maker (AMM) models. Whether you're new to decentralized finance (DeFi) or looking to optimize your yield strategy, this comprehensive breakdown covers everything you need to know.
What Is Liquidity Mining?
Liquidity mining refers to the process of providing funds to a liquidity pool built on an automated market maker (AMM) model. By depositing assets into these pools, users become liquidity providers (LPs) and earn a share of the trading fees generated from token swaps within the pool.
One key advantage is the ability to amplify returns using leverage, though this introduces additional risk. It’s important to note that leveraged liquidity mining carries liquidation risk, meaning unfavorable price movements could result in partial or total loss of capital if margin levels are breached.
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Supported Pairs and Eligible Assets
Not all cryptocurrency pairs are available for liquidity mining. Platforms typically support major trading pairs such as BTC/USDT, ETH/USDT, and other high-liquidity combinations. The full list of supported pairs can usually be found in the platform’s liquidity mining section.
Any digital asset listed as part of a supported trading pair is eligible for participation. This includes stablecoins like USDT and major cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH).
How Are Returns Generated?
Returns in liquidity mining come from facilitating trades in derivative markets. These yields are generated off-chain and managed by trusted third parties, which may include entities affiliated with the exchange itself. Unlike traditional DeFi protocols, this process does not involve on-chain smart contract activity, reducing gas costs and blockchain congestion concerns.
Fees and Account Requirements
Adding or removing liquidity generally incurs no direct fees from the platform. However, large deposits or withdrawals may experience slippage—a deviation in expected asset value due to imbalances in the pool.
To participate, users must complete at least Level 1 identity verification (KYC). Enterprise accounts are also eligible, provided they meet verification standards. Sub-accounts can be used to access liquidity mining products, offering flexibility for institutional or multi-user setups.
Understanding Principal Risk and Impermanent Loss
While your deposited token quantities remain constant over time thanks to the x × y = k invariant formula used in AMMs, the value of your position can fluctuate due to market price changes.
This leads to a phenomenon known as impermanent loss—a temporary reduction in portfolio value when the prices of deposited tokens change relative to each other. The greater the volatility, the higher the potential loss compared to simply holding the assets.
The x × y = k rule ensures that the product of the two token amounts (x and y) in the pool remains constant, adjusting proportions automatically as prices shift.
How Is Liquidity Calculated?
You can deposit either a single asset or a balanced pair into the liquidity pool. The system automatically rebalances your contribution based on current pool composition and the index price of the derivative contract.
For example:
- Without leverage: A $6,000 deposit might convert into 1 ETH + 3,000 USDT.
- With 2x leverage: The same $6,000 becomes 2 ETH + 6,000 USDT, doubling exposure and potential returns—or losses.
Liquidity values are updated every five minutes based on real-time pricing data.
Impact of Price Changes on Liquidity Value
Let’s say a user adds 30,000 USDT to a BTC/USDT pool when BTC is priced at 30,000 USDT. The system allocates 0.5 BTC and 15,000 USDT, making k = 7,500.
If BTC rises to 36,000 USDT after a year:
- New allocation: ~0.456 BTC + ~16,431 USDT
- Total value: ~32,863 USDT
If BTC drops to 24,000 USDT:
- New allocation: ~0.559 BTC + ~13,416 USDT
- Total value: ~26,833 USDT
These fluctuations demonstrate how price movement affects overall returns—even with a fixed token product.
Order Limits and Leverage Caps
There are minimum and maximum thresholds for liquidity orders, visible during placement. Similarly, each trading pair has its own maximum leverage limit, which varies depending on volatility and risk profile.
Estimating Annualized Yield
Estimated annualized return is calculated using:
Estimated APY = Pool APY × Leverage
The pool’s historical yield is based on actual earnings over the past three days, giving a near-real-time performance indicator.
Total earnings represent cumulative returns from fee sharing. These are recalculated hourly and distributed upon withdrawal or reinvestment.
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How Are Earnings Distributed?
Your share of pool earnings depends on your proportion of total liquidity provided:
Earnings = (Your Liquidity / Total Pool Liquidity) × Total Pool Earnings
For instance, if you contribute $8,000 to a $1M pool generating $1,000 daily, you’d earn $8 per day.
Unclaimed earnings update hourly. When you remove liquidity, any pending rewards are automatically credited to your account.
Reinvestment is possible whenever unclaimed earnings reach at least 1 USDT, allowing compounding without manual transfers.
Liquidation Risk and Risk Management
Without leverage, there is no liquidation risk. However, leveraged positions can be forcibly closed if price movements erode margin buffers.
In contrast to USDT perpetual contracts—where 2x leverage triggers liquidation at 50% of entry price—liquidity mining often sets the threshold at 25% of entry price, making it relatively safer under similar leverage conditions.
You’ll receive three types of alerts:
- 20% away from liquidation: Warning via email and app notification.
- 10% away from liquidation: Final warning before potential closure.
- Post-liquidation notice: Confirmation of position closure.
These alerts are sent once every 24 hours per threshold. Depositing additional funds helps reduce leverage but does not increase your stake in the pool—it only repays borrowed portions.
Monitoring Your Positions
All liquidity mining activity—including active orders, earned rewards, liquidations, and conversions—can be reviewed under the Wealth Account section of your portfolio dashboard.
Use the "Active Orders" tab to track:
- Trading pair
- Principal amount
- Total liquidity
- Liquidation price
- APY
- Total and unclaimed earnings
The "All Orders" tab provides a historical view filtered by type, date, asset pair, and transaction category.
Frequently Asked Questions
Q: Can I use a sub-account for liquidity mining?
A: Yes, both primary and sub-accounts are supported for participating in liquidity mining programs.
Q: What causes impermanent loss?
A: Impermanent loss occurs when the price ratio between deposited tokens changes significantly after deposit. The larger the divergence, the greater the loss compared to holding.
Q: How often are earnings calculated?
A: Earnings are recalculated hourly based on your share of the pool and distributed upon claim or reinvestment.
Q: Does adding liquidity cost money?
A: No fees are charged for depositing or withdrawing liquidity. However, slippage may occur with large transactions.
Q: Is KYC required for liquidity mining?
A: Yes, individual users must complete at least Level 1 identity verification. Enterprise accounts are also accepted with proper verification.
Q: How is liquidation price determined?
A: It's based on your leverage level and initial entry price. For 2x leverage, liquidation typically occurs when the index price reaches 25% of entry value.
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