Recently, I’ve seen more and more people discussing liquidity mining in the community, but most people actually don’t understand what it really is. I also spent quite some time to truly understand this concept, so today I want to share my understanding with everyone.

Liquidity mining, called Yield Farming in English, simply means you put tokens into a liquidity pool, and the exchange or platform will give you rewards. It sounds a bit like mining, but it’s actually completely different. Traditional mining involves using mining machines to maintain the blockchain network, but liquidity mining doesn’t require mining machines or electricity; it’s purely providing funds.

So what is liquidity? Liquidity refers to the trading ability and ease of converting assets. Assets with high liquidity have large trading volumes and can be traded at any time; assets with low liquidity are hard to find buyers for. For example, selling a house on the same day is basically impossible, but stocks can be sold at market price anytime. This is also the reason why liquidity mining exists—to help market participants complete transactions faster and at lower costs.

There are two ways to provide liquidity. One is on centralized exchanges, usually operated by institutional market makers; the other is on decentralized exchanges, where anyone can participate with almost zero threshold.

Regarding the returns from liquidity mining, they mainly come from two channels. One is direct platform rewards, which are usually higher in the early stages of a project; the other is trading fees, which provide long-term stable income. These rewards are generally airdropped automatically into your account or wallet, no manual claiming needed, and the system distributes them proportionally based on your contribution.

When choosing a liquidity mining platform, I think the most important aspects are a few. First is the platform’s reliability—choose a big platform to avoid the risk of collapse or exit scam. Second is security—be sure to select platforms that have been audited by reputable auditing firms, because DeFi projects are vulnerable to attacks. Third is the choice of tokens—preferably major coins with large market caps, like Bitcoin, Ethereum, Solana, etc. Don’t chase high yields by buying small-cap tokens, as the profits might be wiped out by losses. Lastly, look at the yield rate—under the premise of safety, choose pools with higher returns.

Liquidity mining isn’t very complicated to operate. If you’re using a decentralized exchange, all you need is a wallet. After connecting your wallet, select the trading pair you want to participate in, such as ETH/USDT, then enter the amount and fee parameters, and confirm. Note that most of the time, you need to deposit both tokens, although some platforms now support single-token pools, but generally, dual-token mining yields are higher.

However, liquidity mining also carries risks. First, beware of scams—don’t click on phishing sites, and always check carefully when authorizing. Second, there’s the risk of smart contract vulnerabilities, so choose audited platforms and avoid new projects. Lastly, there’s a risk called “impermanent loss,” which occurs when large price swings allow arbitrageurs to profit at your expense; the bigger the price fluctuation, the higher this risk.

Overall, liquidity mining is more suitable for investors who hold spot assets long-term, as they can earn extra income while holding. But don’t invest all your funds—generally, keeping it within 30% is more stable. After all, every investment has risks; returns and risks are always proportional. You should decide based on your own risk tolerance.