DeFi can be said to be one of the greatest innovations in the history of blockchain, and liquid mining is the fuse of DeFi’s popularity.
Thanks to Compound, a decentralized protocol, liquidity mining will be a blockbuster in the summer of 2020. The Compound protocol allows users to borrow and lend cryptocurrencies and govern them through its native COMP token.
After Compound became popular, other DeFi projects followed suit, creating applications with native tokens and using tokens to reward users. A large number of new projects are constantly bringing more innovative ideas and gameplay to users.
It is no exaggeration that the popularity of liquid mining can be compared with the ICO boom in 2017. For DeFi participants who want to obtain high returns, one of the best ways is leveraged mining.
What is liquid mining
Leverage mining is a type of liquid mining. Before introducing leveraged mining, we need to understand what liquid mining is.
In the past year, liquidity mining has caused a huge sensation in the DeFi encryption field. If you compare it to traditional investment, it is like bond income or dividends.
Liquidity mining is the core of any DeFi project. Users can buy and sell the mined tokens in the DEX liquidity pool. Generally, the liquidity mining of new tokens has a high annualized rate of return to attract traders to provide liquidity, usually 1% to 6% per day.
Essentially, liquidity mining is to exchange for rewards by staking or locking up cryptocurrencies.
When users lend or pledge their cryptocurrency in an agreement, they are called “liquidity providers.” Liquidity providers continue to transfer their cryptocurrencies between different lending markets to maximize returns.
The DeFi protocol rewards liquidity providers with their own tokens. If you are the first person to provide liquidity for the agreement, you will get a 100% return. Until other people join in, they will carve up part of your share, resulting in a gradual decrease in your income.
According to the law of supply and demand, liquidity providers will flock to each new project that provides new tokens or fees as a reward, hoping to get a share of the pie. In turn, demand is created, pushing up the value of projects and tokens.
The main sources of income generated by liquid mining are:
Borrowing generates interest income
Provide liquidity to obtain protocol tokens
Pledge tokens to obtain protocol tokens and transaction fee income
Automatic re-shooting of machine gun pool
Obviously, DeFi is unlocking a series of new and exciting passive income opportunities.
So far, the development of DeFi mining has extended different gameplay. Common DeFi mining methods are mainly divided into loan mining, pledge mining, leverage mining and machine gun pool mining.
What is leveraged mining
In short, leveraged mining is nothing more than a combination of liquid mining with borrowed assets (plus leverage), automatic reinvestment of mined tokens and transaction fees, thereby increasing its own returns over time.
Leveraged mining is the first innovation proposed by Alpha Finance Lab. Alpha Homora developed by Alpha Finance Lab, in October 2020 deployed Ethernet Square on the field is DeFi’s first leveraged mining agreement.
In the DeFi field, investors actually have many income opportunities. However, due to lack of funds and lack of effective strategies, users may not be able to take full advantage of these wealth opportunities. At present, the fund utilization rate of most DeFi agreements is still at a low level.
In order to meet the leverage requirements in multiple scenarios, the leverage agreement needs to be able to aggregate multiple profit targets and provide convenient, efficient, and verifiable revenue strategies. Leveraged mining allows users to borrow assets to establish a larger position than they hold, while the borrower needs to pay interest.
To ensure that the borrower can eventually repay the loan, the agreement uses the funds in the user’s account as collateral. The collateral grows as the rate of return minus the accumulation of borrowing interest. However, the collateral should always be higher than the borrowed amount.
The pros and cons of leveraged mining
If the user chooses not to use leverage, then the risk is no different from participating in other liquid mining methods. There is only a temporary loss risk, and no liquidation risk.
By introducing the leverage mechanism into the agreement, liquidity providers can obtain several times the principal to participate in liquidity mining. To a certain extent, leveraged mining provides most users with lower entry barriers and higher return on investment.
Why do users choose leveraged mining?
1. Improve capital utilization
For DeFi players, there are more and more ways to participate in liquid mining to obtain income, but the low mining efficiency has been criticized. In addition, agreements such as over-collateralized loans have extremely inefficient use of funds, which greatly hinders the development of liquid mining and the participation of users.
Leveraged mining enlarges the user’s principal by adding leverage, thereby maximizing the utilization rate of funds, allowing users to obtain higher returns with less funds.
2. Both rise and fall can be profitable
When the market breaks out, basically all DeFi mining agreements can make investors profitable.
However, leveraged mining can guarantee the user’s profit in a declining market to minimize losses. How is this done?
Because leveraged mining involves borrowing coins, this is essentially a shorting. If the price of the coins you borrow falls, you will have to return less value. The short selling function is an extremely useful tool in the down market. Whether it is a retail investor or a giant whale, there is always a need to reduce risk through hedging.
3. No minimum capital requirement
There is no minimum capital requirement for users to participate in these mining. All users attempting to earn revenue have the opportunity to use reputable DeFi products. The smart contracts of these DeFi projects will be audited, which greatly reduces code risk.
However, for any DeFi product, there will always be a certain amount of loss-which means that no user should use more capital than they can afford to lose.
Every coin has its pros and cons, and leveraged mining also has certain risks. Users need to bear corresponding risks while having high profits.
4. Liquidation risk
Leveraged mining is a mechanism that allows liquidity providers to increase their mining positions, which means borrowing external liquidity to increase their liquidity and conduct mining. For example, a platform allows investors to borrow 2,000 U.S. dollars of cryptocurrency from 1,000 U.S. dollars, with a leverage ratio of 2:1.
However, if the user chooses to use leverage, then he will face the risk of liquidation. If the price of the token drops and the debt ratio reaches the liquidation level, you may lose all your assets.
5. Vulnerability risk
Computer code is not perfect, and loopholes are inevitable. Even if programmers do their best to ensure that the code works as expected, they may miss something.
Sometimes, the vulnerability can be serious. Hackers can use this vulnerability to attack. If you have provided liquidity to the agreement, it may cause you to lose your funds and cannot be recovered.
6. The risk of impermanent loss
Impermanence loss is one of the risks that cannot be ignored. Impermanent losses are asset losses that occur when investors provide liquidity, and may even incur negative returns.
When the price of the token provided by the liquidity provider changes, it will lead to impermanent losses. The greater the price change, the greater the impermanence loss. The impermanence loss seriously hurts the interests of leveraged mining investors, and they have to pay higher transaction fees to eliminate this loss.
Solana Leveraged Mining Agreement
For any agreement that wants to work in the DeFi field, creating a solid DeFi infrastructure and building blocks is one of its main goals.
Solana is becoming the preferred development platform for DeFi projects with its outstanding features and business model, and it is becoming a real paradise for DeFi.
In addition, the interoperability of the Solana blockchain is the key to aggregate liquidity and can provide users with a seamless, efficient and trustless user experience. By breaking the barriers between assets on different networks, users of different networks can become liquidity providers for DeFi projects on the Solana blockchain.
Most of the existing liquidity mining protocols cannot meet the needs of DeFi users, and the leverage function has not been fully utilized. Some agreements have insufficient incentives and governance issues, leading to low annualized returns.
In order to solve the inefficiency and low yield of liquid mining, the Solana ecosystem has integrated some new leveraged mining protocols, which can quickly integrate high-quality investment strategies and bring more possible benefits.
Solfarm is the first revenue aggregation protocol on the Solana blockchain. When users use the Solfarm protocol, they can have the benefits of convenience, low gas fees and automatic reinvestment.
Based on the SPL token lending plan, Pyth oracle network users can use Solfarm vaults to open leveraged mining positions, while also creating a liquid lending market, thereby providing additional interest earning opportunities.
The Solfarm team has confirmed that no native tokens will be issued during the launch, but they may reward early participants in the test.
Francium is a leveraged income aggregator built on the Solana blockchain.
Francium Protocol aims to provide different income goals and strategies through leverage, allowing users to use leveraged positions in multiple strategies such as portfolio management, liquidity mining, and algorithmic trading strategies.
Francium’s efficient leverage module implements leverage based on a liquidity pool with dynamic interest rates. Lenders can deposit cryptocurrencies into the liquidity pool for interest and receive LP tokens as a return. These tokens can also be traded on DEX. For borrowers, they can use an effective strategy to use leverage in the yield aggregator to expand profits.
The revenue aggregation module provides diversified revenue goals and strategies. Revenue strategies are divided into community strategies and selected strategies. The community strategy is composed and developed by users using Francum api. The user can also choose to share his strategy with the community. The selected strategy is based on the verification of community governance and the strategy approved by voters.
Everlend is a decentralized cross-chain lending protocol based on Solana to provide leveraged mining revenue and liquidity collateral, established by Attic Lab and Everstake.
Everlend’s goal is to eliminate the boundaries between networks and create a unified financial instrument that anyone can access anywhere.
As a liquidity aggregator, Everlend will provide ordinary liquidity mining services. The diversity of assets makes the Everlend protocol a universal exchange center.
Another core function of Everlend is liquid staking, which will be realized with the help of Lido. st SOL assets generate rewards by staking SOL, so if users use stSOL as collateral, it is allowed to generate additional rewards.
degenbanana is a leveraged mining protocol on Solana, and the content being built is essentially similar to Alpha Homora. degenbanana strives to make leveraged mining in the Solana ecosystem easier. In this process, degenbanana will solve all imaginable user experience challenges, create the desired rich protocol, and attract a large number of users.
degenbanana has discovered some problems and challenges in liquid mining, and is committed to solving these problems and challenges:
- Users need to store the correct assets in the pool;
- Some mining is quite safe and stable, but it is difficult to use the profit;
- Temporary loss is difficult to hedge, it hurts the rate of return;
- Users want to invest in volatile assets, but some people want their profits and losses to be denominated in U.S. dollars;
- Other chains have higher returns, but cross-chain swaps are troublesome.
degenbanana was developed under extreme confidentiality. The team noticed that there is a rather ugly trend in DeFi, that is, the speed of cloning is rapidly accelerating. They prefer to only share code with trusted consultants and friendly engineers. In the future, degenbanana will be launched at lightning speed.
What can leveraged mining bring to Solana?
Value management is crucial to breaking the barriers of the traditional financial system. The birth of DeFi and its rapid development have brought more possibilities for realizing value management.
However, we all know that with the rapid expansion of DeFi, the Ethereum blockchain network is facing huge scalability problems.
Therefore, blockchain developers have to find a higher-performance blockchain network to solve this big problem, and strive to provide users with a better user experience and more competitive opportunities.
In the process, Solana, the “new continent”, was gradually discovered and regarded by developers as an excellent value management system. Solana is an open source project and it is becoming an innovative, high-performance, permissionless blockchain.
At present, there is still a lot of room for improvement in the interoperability between different blockchains. Without the ability to connect and communicate with each other, these blockchains may eventually become huge data silos. The “shaft” is particularly inefficient in terms of finance and liquidity.
Solana’s Wormhole cross-chain bridge perfectly solves this problem, allowing cross-chain transactions to be carried out in a fast and decentralized manner. Wormhole allows users to easily move assets between Solana, HECO, BSC, Ethereum and other blockchains, and benefit from Solana’s high-speed and low-cost features.
Multiple blockchain participants can bring more liquidity and have a positive effect on efficiency and stability. In turn, this can enable a substantial increase in transaction volume, and the income of liquidity providers will also multiply, eventually forming a closed loop.
Through the integration of leveraged mining and asset cross-chain, Solana ecology can build more innovative DeFi products, solve asset cross-chain problems, and allow users to obtain high returns through leveraged mining.
Imagine that when you borrow or provide liquidity on Solana, even when it comes to cross-chain transactions, you can enjoy a fast transaction experience without having to pay expensive fees. On this basis, you can also get token rewards, you can automatically reinvest these tokens, and you can even increase leverage to generate more income.
With the progress and development of the DeFi field, investors have increasingly diverse choices. There are many liquid mining projects on the market, but the future belongs to those safe, efficient, and scalable protocols. They have mature products and professional teams, and they can provide investors with high-yield and low-risk options.
For Solana users, everyone should choose their own mining type and platform based on their own risk tolerance, capital size, method preference, etc.
For Solana itself, its core goal is to build a brand new ecosystem to bridge the limitations of DeFi, while greatly reducing user operating costs and transaction risks, so that liquid mining is no longer affected by the low performance of public chains. Limit and allow users to maximize profits through leveraged mining.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/an-article-to-understand-the-solana-leveraged-mining-protocol-ecology/
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