What You Need To Know Before You Start Game Mining

 The market value of Defi (Decentralized Financials) fell from $26 billion which was locked in at the start of the year to $113 billion in November 2021, according to Defi Pulse. This popularity is due, in part, to a large number of investors interested in Defi products that offer relatively high returns. Among them is liquidity Game Mining.

Promising returns for liquidity providers (LPs) across different market makers include juicy annualized rates on cryptocurrencies. However, if you're interested in taking on this type of investment, it's worth delving a little deeper into what it consists of and what its risks are.

What is Liquidity Game Mining?

In the past, we have established that liquidity crypto game mining can only be considered a system within the Yield Farming niche, which also includes other advanced methods to earn with Defi tokens. Generally speaking, we can say that it consists of betting or borrowing cryptocurrencies to generate investment returns. Compared to traditional (and regulated) mechanisms, it is much easier to invest here as it is still an unregulated space.

In liquidity game mining, liquidity providers are incentivized to invest a certain amount of funds in the smart contract of a liquidity pool in exchange for financial benefits. The purpose of this is to ensure that the pool has enough assets for use and exchange between users.

Thus, a liquidity provider deposits its tokens, usually in pairs (such as EHT/DAI for example) into a liquidity pool provided by Defi Platform. Other traders then use these tokens and those who deposited their tokens receive the transaction fees (distributed among all liquidity providers).

Defi Platform uses this mechanism to ensure that there is enough liquidity for the platform's exchanges. However, the larger the number of LPs and the smaller the number of transactions, the returns for LPs decrease as the distribution of rewards is proportional to the total activity.

Therefore, to receive high investment returns from liquidity pools, it is common for LPs to deposit large amounts of money in the most popular decentralized exchanges with high daily trading volumes.

Liquidity Extraction Risks

Permanent Loss

One of the main risks that beginners face when entering a liquidity pool for the first time is a potential Permanent Loss. This means that the tokens you have locked in the pool may lose their value if you cannot move them. Depending on when you want (or can) move the money, these losses may or may not be permanent.

Similarly, if you provided liquidity with an ETH/DAI pair in a particular distribution, for example, you may receive a reward that is not favorable to you. So, perhaps you deposited X amount of tokens in equal proportion. 

Let's say 50% in ETH and 50% in USDC. However, at the time of withdrawal, they may give you 30% in ETH and 70% in USDC, so to speak. This is because the liquidity team may need more ETH at that time for swappers, therefore, you will probably lose money if the ETH price increases.

Also, it may be the case that you receive rewards in tokens other than those deposited. These tokens are generally used for governance projects, but they must be exchanged for another crypto for other uses. As such, their volatility can be much higher than the deposited pair and you may see your earnings affected. 

Reliability of the project

Another risk users are exposed to is facing Defi projects that have many problems (governance, scalability, etc.) and are destined to fail. Or, directly, they are designed from the start to escape investors' money (scams - carpet pullers).

It is necessary to do your own research (DYOR) before investing. The authors of many projects that turn out to be legitimate over time are anonymous, so you should pay attention to other signs. Among them, study the white paper, the roadmap, tokenomics, smart contract checks (if any), and what the experts and the wider community say about it.

You should also keep up to date with all developments and potential bad signals. To do this, you need to subscribe to all the channels provided by the project. These usually include Twitter, Discord, and Telegram.

Code vulnerability

As DeFi is a new technology, it is common to find protocols that have not been effectively deployed. In the case of liquidity mining platforms, smart contracts may have vulnerabilities that can be exploited by hackers at any time.

Even if you can't (or don't know how to) read line-by-line the code these exchanges are programmed with, never trust projects that don't have incentive programs for bug tracking and are not transparent to the community about their code. Again, publishing public audits is important.

How to choose a Liquidity Game Mining team?

There are three main aspects to consider when choosing a liquidity team:

Capital reserve

A sufficient amount of liquidity in the reserve will ensure that the ratio deposited fluctuates less, which directly leads to a lower risk of permanent loss. It is also important to consider decentralisation: liquidity should not only come from a few whales. In this case, if these large investors withdraw, liquidity will plummet and so will the group's profits.

Trading volume

Choosing a liquidity team with a high trading volume can be beneficial for both beginners and much more experienced investors. The higher the number of trades on the platform, the higher the fees will be. And the fees are where the collective profits will come from

Price Divergence

The variation in the price of one crypto couple relative to another in the liquidity pool is called "price divergence". It is directly related to the permanent loss because the latter can be reversed if the price divergence is also reversed. This is why it is necessary to be very aware of the cryptocurrency market when investing, including possible news and changes that directly affect prices.

Conclusion

In a previous article, we named two platforms for performing performance farming and liquidity game mining. But from 2023 we can name at least three DEX platforms that have increased their popularity and are currently at the top.