With the rapid development of decentralized finance (DeFi) in the past year, people gradually realize that speculation is not the only way to generate profit, and liquidity mining has become a popular attempt for many sophisticated crypto users. Liquidity mining has increased the risk of loss, reduced rate of return, so that many users have changed their minds. Today, we will introduce a simple and high yield mining method – single sided liquidity mining.
Introduction
DeFi mining on the market is mainly dual-currency liquidity mining, single sided liquidity mining. Note: Both dual-currency and single sided liquidity are liquidity provision for the platform. Broadly speaking, they are liquidity mining. For ease of reading, this article divides them in detail.
The benefits and risks of dual currency liquidity mining
Liquidity mining is the most lucrative and risky form of mining. Taking MDX-USDT as an example, this paper describes the benefits and risks of LP mining.
So the APY is up to 400%. However, in order to achieve such a profit, users must meet the following conditions: 1: MDX price should be low enough at the beginning, and then investment increases; 2: mining income needs to make up for the impermanent loss caused by currency price fluctuation, so that the income will not decrease. So all this means you should be pretty good at math.
We can do the calculation as follows:
Suppose the initial price of the MDX is about $1. Let’s say you have $10,000, and you want to exchange $5,000 for 5,000 MDX, so you can provide liquidity for the MDX/ USDT pool.If the MDX price rises and is now around $6, what is the value of your position? The answer is $24495.
So how do we calculate the impermanent loss?
If you bought $5000 of MDX and did nothing, your assets would be: 5000MDX* $6 +5000 = $35,000.
So the income that you should have receive, and now you don’t, is an impermanent loss: $35,000 – $24,495 = $10,505. So the impermanent loss is higher than $10,000.
If you exchanged all your USDT ($10,000) for MDX, it would have been $10,000 and gone straight to $60,000, because the MDX price has gone up 6 times. This means that you are suffering more impermanent loss. If the MDX price falls, it’s even worse, because you will lose all your principal.
Therefore, users will benefit more from liquidity mining if they are sophisticated DeFi participants and good at developing strategies. If you cannot calculate changes in principal and income compensation before joining, you may need to be more cautious.
Risks of Liquidity Mining
1: Project risk & Smart contract risk
All blockchain projects that use smart contracts have potential risks. The more advance the contract, the longer its code gets. As your code gets more complex, the risks of bugs in your code increases.
DeFi projects are using smart contracts written by the source code. If there are logic errors, security loopholes, backdoors and other issues in the code, users may face huge risks and the serious loss of principal.
For example, in the OKExChain-based AST project, all 60,000 OKTs in the contract were locked up due to code problems and the funds could not be permanently withdrawn.
For example, more than $600 million worth of crypto was stolen in a cyberattack that targeted a decentralized finance platform called Poly Network. While hackers have dramatically returned stolen tokens, projects can’t always be that lucky.
Then there is the risk that the project may run away. In fact, it is also a kind of smart contract risk. Some projects deliberately leave a back door for its future escape, which will also bring huge loss es to users.
So for most users, security first, profit second. However, how to identify the security of a project is a headache for everyone, even after the third-party audit can not guarantee that everything is safe.
2: Liquidity Mining Risk: Rug Pull
Rug pulls happen when the project’s founders have no good intentions from the start. A rug pool is when the developer decides to shut down the whole thing and then runs away with user funds. This can be avoided by staying away from centralized projects, but most importantly, doing your own research is a aways a good suggestion.
3: Operating Cost
In fact, there are costs for liquidity mining, among which gas fee is the biggest cost. Every interaction with the smart contract requires gas fees, and the more frequent the operation, the more gas fees. Especially with the Ethereum, a normal transfer can cost tens or even hundreds of dollars during congestion.
4. Risk of over-authorization
Participating in DeFi projects means we will need to grant these projects the power for the contract to interact with our crypto wallets. Most of the time the whole process will require us for confirmation when an interaction is made. However, we must be careful and avoid rug pulls that might run away with our assets.
A Simple Way to Win: Single Sided Liquidity Mining
Now let’s talk about single sided liquidity mining. Single sided liquidity mining is also known as single sided non-destructive liquidity mining, or “get the best deal for free”. It features a stake a single crypto asset to generate passive income. This is low-risk (and in most cases it’s risk-free) and simple to operate. The biggest drawback is that the yield is not very high. For example, the annual return of staking BTC on Compound is 0.36%, and staking HT on Channels 1.33%.
SheepDex (https://www.sheepdex.org) is the first V3 liquidity aggregation DEX on BSC, which allows users to provide liquidity into the liquidity pool within certain price range, concentrating liquidity close to the current price, facilitating transactions and improving capital efficiency by hundreds of times. This can not only reduce the trading slippage, LPs can also get more transaction fees.
Launched on October 10, 2021, SheepDex aims to be a decentralized Binance. It offers higher yields and more security to the users. Since SheepDex is a professional product for v3 liquidity mining, it has gained the traction from high quality institutions and traders to participate. However, because there is a threshold, such as the knowledge to calculate impermanent losses, some users may feel it too professional and not easy to use.
But as SheepDex and its blockchain technology continue to evolve, the innovative derivatives will be launched. So to support derivatives, SheepDex will also release its single sided liquidity provisioning. Therefore, users will be allowed to maximize their returns on the platform. They can swap for 1 VSPC with 1 SPC, and then they can stake their VSPC on SheepDex and earn BNB. If they want to swap for SPC with VSPC, a 7% fee will be charged. Meanwhile, SPC/VSPC trading pair will be added. Users can provide liquidity into the pool to get liquidity mining rewards in SPC.
Single sided liquidity mining has three benefits for users:
Firstly, it’s easy to use. After the asset is staked, there is no need to consider the loss of principal; impermanent loss can also be avoided;
Secondly, users can get higher yields. DeFi investors do not need to seek various high-yield pools, single sided liquidity mining can also achieve an annualized rate of 100%.
Thirdly, it can reduce costs for users.
Conclusion
Liquidity mining is more suitable for sophisticated users. There are risks if calculations are wrong or if crypto price fluctuates wildly. Although single sided liquidity mining has a lower APY, but also the least risk. The only risk is whether the high yields are sustainable. And this could be a good opportunity to be involved since it’s still in its early stage.
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