How does Liquidity Mining actually make money? You need to know these 7 Decentralized Finance platforms.

Want to earn passive income in DeFi? Liquidity Mining (Yield Farming) might be the most straightforward way. Simply put: you lock your coins into a liquidity pool → traders use your coins for exchanges → you earn transaction fees. This is much more enjoyable than just holding coins or trading short-term.

How Does Liquidity Mining Work?

Traditional exchanges match buy and sell orders using an order book, but DeFi is different – it uses a liquidity pool. You and other LPs (liquidity providers) lock assets into a smart contract, allowing traders to directly exchange from this pool without waiting for counterparties. The more liquidity you provide, the more you earn in fee shares.

For example, in the ETH-USDT pool of Uniswap, traders pay a fee of 0.3% for each swap, and this money is distributed to all LPs. It sounds great, but there are also pitfalls - Impermanent Loss can quietly eat away at your profits, which I will explain later.

Mainstream Platforms Showdown

Lending: Aave & Compound

Aave: The most mature lending protocol, supporting 13 chains. You deposit coins to earn interest, with interest rates linked to borrowing demand. The advantages are relatively low risk and a proven historical track record; the disadvantage is that it can be difficult for beginners, as borrowing requires over-collateralization (to borrow $1000, you need to collateralize $1500).

Compound: Focused on Ethereum, Arbitrum, and Polygon, it supports fewer coins than Aave, but high liquidity means high stability. The downside is that the APY is usually not as attractive as smaller platforms.

Exchange types: Uniswap, SushiSwap, Curve

Uniswap is the leader, a fully decentralized AMM (Automated Market Maker). The V3 version allows you to customize the liquidity range, improving capital efficiency. However, be aware of impermanent loss and gas fees (which can be expensive on Ethereum).

SushiSwap is a fork of Uniswap, but it returns a portion of the trading fees to SUSHI stakers. The community atmosphere is good, but there is not much innovation; it essentially follows the V2 model.

Curve specializes in stablecoins and wrapped assets (such as ETH-WETH), with low volatility and almost no impermanent loss. It is suitable for conservatives, but the choice of coins is painfully limited.

Aggregator: Yearn Finance

Instead of doing exchanges and lending yourself, it helps you automatically switch between major protocols to find the best returns. If you want to manage your finances lazily, you can consider it, but Yearn has been hacked multiple times and there is no insurance fund for compensation.

How to Choose a Platform

1. Check Security Records — Prioritize audited open-source code, be cautious with those that have a history of hacks (Yearn, Curve have both faced issues).

2. Calculate Impermanent Loss — The greater the volatility of the coin, the more you lose. High APY altcoins may seem attractive, but by the time you actually withdraw, the coin price has already dropped.

3. Compare Gas Fees — The mining costs on Ethereum are too high, try Polygon, Optimism, and Base, these L2s have much cheaper transaction fees.

4. Check Liquidity and TVL — A high TVL (Total Value Locked) indicates that this pool is trusted and has a lower risk of rug pull.

5. APY is dynamic — The more liquidity there is, the lower the APY, and vice versa. Don't be fooled by high APYs; take a close look at the historical trends over the past month.

6. Check Project Activity — Active developers + strong community = long-term viability. Platforms like Aave and Uniswap with DAO governance are relatively trustworthy.

Beginner Tips

Don't jump in and invest all your assets at once. Start by testing with major platforms, stablecoin pairs, and low APY combinations (like USDT-USDC on Curve). Once you understand the process and risks, then consider high-yield strategies.

Don't forget to do your own research (DYOR), especially for new projects that promise high profits. In DeFi, high returns often come with high risks—including contract risks, impermanent loss, and market risks.