Nowadays, the decentralized finance (DeFi) projects have been at the forefront of blockchain innovation. Why are DeFi applications so different? Because they do not need any permissions, and they can interact with DeFi programs as long as an internet connection is available and a supported wallet (or other forms, such as a smart contract) is prepared.
Furthermore, they generally do not need to earn the trust of any custodians or any intermediaries. In other words, they don’t need a trust from each side. Then what new applications can these advantages help bring to the industry?
Liquidity mining is one of the new concepts deriving from DeFi. It is a new way for investors to gain rewards by holding cryptocurrencies with liquidity protocols that need no permissions. It enables everyone to use the decentralized “money Lego” ecosystem built on Ethereum to get passive capital income.
Then how exactly does liquidity mining work, and what kind of profit allocation mechanism does it have?
We can illustrate this with a simple example.
Suppose there is a foreign currency exchange office, which mainly provides exchange services between euros and US dollars. At the beginning, it uses the mode that matches up two groups in need. For instance, it matches up one people who wanted 1,000 US dollars with a group of four people who want totally 820 euros to allow them to exchange with each other.
If one group cannot be matched up for the time being, its exchange request will be shown on the system as an order until another group in need comes to find it to exchange. This is called the order book mode, which was used by cryptocurrency exchanges before.
However, exchanges in this way can be realized only if orders of exchange request have been placed, but many people holding considerable euros and dollars would leave without placing exchange orders if they find the exchange rate not satisfied. Hence the exchange chance is very limited. It will take a long time for an order to be filled if generally not so many people who exchange coins appear and thus the liquidity will not be very good.
At this time, this exchange office comes up with a new method and opens two deposits accounts respectively in US dollars and euros, so people who have money but do not need it temporarily can put their foreign currency there and then get interests.
In this way, this office can have a storage capacity of 1 million US dollars and 820,000 euros very soon. The dollar account and the euro one are paired to form a pool at this time with a ratio of 1 million dollars : 820,000 euros. Anyone that comes to exchange dollars can take them directly also from the pool of euros at the exchange rate, and vice versa.
In this way, exchanges are available at any time of the day, and people no longer have to wait for an exchange like in the order book mode. Thus the exchange liquidity is greatly improved.
And how dose the “interest” which inspires people with spare money to deposit some into this pool come from? It’s the service charge! The exchange office takes the exchange service charges as interests and sends it to the depositor so as to inspire people holding foreign currency to deposit some, and then the liquidity of the pool will get better and better. What used to hold only hundreds of thousands of transactions at a time can now hold millions.
But what if the income get from the service charges is too low and not inspiring enough?
The exchange office then comes up with another method to allow those who deposit money there can regularly gain points according to their amounts of the deposit. The points can be used to exchange some collection products, discount coupons or lottery opportunities in the store. Thus the benefits of points can make depositing money even more profitable.
What’s more, points can not only be exchanged but also used to participate in voting issues such as adding new exchange pairs, increasing or decreasing service charges, etc. — which is directly related to the deposit income again, making the points more valuable.
Even after the scale of the exchange office becomes larger, the points have been handed to many users. These users would keep their points instead of exchanging them in a hurry as they have gained a lot of rights and interests because of the points. At this time, the office decides to distribute a portion of the high daily service charge as dividends to the point holders, so the points have the function of equity in addition to the functions of consumption and voting.
The act of depositing into the exchange office to earn points in this way is called mining. Users’ paying to furnish the exchange office with liquidity and getting a portion of service charges and valuable points in return is liquidity mining.
Does this interpretation make it not so difficult to understand the concept of liquidity mining?
In order to further make the working concept of liquidity mining clarified, we can use PUGG’s DeFi ecosystem for a more in-depth analysis.
PUGG uses a dual-currency staking mode of liquidity mining with a virtual mining machine. In the PUGG Metaverse, users themselves are virtual mining machines (equivalent to POW and POS mining machines) as long as they hold virtual citizen ID cards (NFT) and a certain amount of CALIT tokens. After connecting to a node and selecting a mining pool, they can perform liquidity mining.
Liquidity mining income can be used not only for further staking in the PUGG metaverse to get more profits but also to buy and sell on-chain NFTs with one click to make more diversified investments. At the same time, liquidity mining income CALIT is also the main form of DAO governance. The number of CALIT held by users affects the proportion of their voting in DAO governance to a certain extent.
CALIT has been issued on the decentralized exchange PancakeSwap, and there are three ways to obtain it:
1. To access the official website of PancakeSwap on a PC browser, link your wallet and exchange the CALIT of the same value as BNB according to the number of BNB you have. (If you log in to PancakeSwap for the first time, you need to set a custom token CALIT contract, 0x83404e49ad2a3fde41f3fc4ca946f9c8db3508cd, after you set the number of BNB for exchanges.)
2. To visit the market page on the PUGG official website (https://marketplace.pugg.io/), link your wallet and select a type of NFT+CALIT combinations to exchange, which currently include four types of Card Combinations: N1, N350, N3500, and N7000. According to the number of BNB set in the wallet, click “BUY” on the web page to exchange. Thus users will also own the corresponding NFTs issued by PUGG when they get CALIT.
3. To download the PUGG game on Steam and then register, log in, enter the game, find the mining area, enter it according to user levels (NFT levels, entering the ordinary room or gold VIP room respectively), do activity mining by cycling, gain the corresponding CALIT after completion of activity mining and thereby make profits.
PUGG Metaverse World will help users get the real benefits of liquidity mining in a simple and efficient way.
