Common terms used in liquidity mining, explained:
- APY (Annual Percentage Yield): The annualised return on an investment, factoring in both interest and the compound interest.
- AMM (Automated Market Maker): A decentralised exchange protocol that uses algorithms to determine prices and facilitate trading without an order book.
- Arbitrage: The practice of exploiting price differences between markets to make a profit, often seen in liquidity mining.
- Asset Pool: A pool of funds (usually cryptocurrencies) that liquidity providers deposit to enable transactions within an AMM or DEX.
- Asset Tokenisation: The process of converting real-world assets or commodities into blockchain-based tokens for trade and liquidity mining.
- Atomic Swap: A peer-to-peer transaction mechanism that allows users to exchange different cryptocurrencies directly, without intermediaries.
- Bancor: A decentralised liquidity protocol that provides liquidity to users by automatically adjusting token prices.
- Block Reward: The reward given to a miner or validator for adding a block to the blockchain, often distributed to liquidity providers in some protocols.
- Bonding Curve: A mathematical curve that determines the price of a token based on the supply in circulation, often used in AMMs.
- CEX (Centralised Exchange): An exchange that is controlled by a central entity, where liquidity mining may occur through token pools or other instruments.
- Compound Interest: Interest on both the initial principal and the accumulated interest, a concept often seen in liquidity mining rewards.
- DAO (Decentralised Autonomous Organisation): An organisation controlled by code and smart contracts, often used to govern liquidity pools and decide reward allocations.
- DeFi (Decentralised Finance): A blockchain-based form of finance that removes intermediaries, relying on liquidity pools and protocols for lending, borrowing, and trading.
- Delegated Proof of Stake (DPoS): A consensus mechanism in which token holders vote for delegates to confirm transactions, often affecting liquidity protocols.
- DEX (Decentralised Exchange): A peer-to-peer exchange where users can trade assets directly from their wallets, relying on liquidity pools.
- Distribution Curve: A model that determines how rewards are distributed among liquidity providers, often used in yield farming.
- Earning Rate: The rate at which liquidity providers earn rewards from their pooled assets.
- ERC-20: A standard for creating tokens on the Ethereum blockchain, often used in liquidity mining protocols.
- Escrow: A mechanism that holds assets in trust during a transaction until certain conditions are met.
- Flash Loan: A loan in DeFi that is borrowed and repaid within the same transaction block, enabling arbitrage or liquidity mining opportunities.
- Farming: The act of providing liquidity to a pool to earn rewards, typically in the form of governance tokens.
- Gas Fees: Transaction fees paid to miners for processing actions on the blockchain, including liquidity mining operations.
- Governance Token: A token used to vote on decisions within a decentralised organisation, often related to protocol updates or liquidity pools.
- Impermanent Loss: The potential loss of value experienced by liquidity providers when the price of the assets in the pool diverges significantly.
- Initial DEX Offering (IDO): A method of launching new tokens via a decentralised exchange, with liquidity mining often incentivised.
- KYC (Know Your Customer): A process used to verify the identity of users in centralised exchanges, not typically applicable to decentralised liquidity mining.
- Lending Pool: A pool of assets lent out to borrowers in return for interest, often tied to liquidity mining protocols in DeFi.
- Liquidity: The availability of an asset in a market or pool, enabling users to easily buy or sell without significant price changes.
- Liquidity Mining: The process of providing liquidity to decentralised protocols in return for rewards, typically in the form of tokens.
- Liquidity Provider (LP): A user who supplies liquidity to a protocol, generally by depositing assets into a liquidity pool.
- Liquidity Pool: A pool of funds that enables decentralised trading, where liquidity providers are rewarded for supplying assets.
- LP Token: A token representing a liquidity provider’s share in a pool, which can be used for claiming rewards or additional liquidity mining.
- Market Maker: An entity that provides liquidity to a market, typically by offering to buy and sell assets at quoted prices.
- Market Order: An order to buy or sell an asset immediately at the current market price, typically facilitated by liquidity pools.
- Minting: The process of creating new tokens, often used in the context of liquidity mining to create tokens that incentivise liquidity providers.
- NFT Liquidity Mining: A form of liquidity mining that involves NFTs (Non-Fungible Tokens) as part of the rewards or assets in liquidity pools.
- Oracle: A third-party service that provides real-world data to smart contracts, often used to feed price data into liquidity protocols.
- Perpetual Swap: A type of contract that allows traders to speculate on asset prices without an expiry date, often offering liquidity mining incentives.
- Price Slippage: The difference between the expected price and the actual price when executing a trade, often caused by insufficient liquidity.
- Protocol Token: A native token of a protocol used as a reward for liquidity providers or for governance purposes.
- Proof of Stake (PoS): A consensus mechanism in which users lock up a cryptocurrency as collateral to validate transactions, potentially impacting liquidity mining.
- Proof of Work (PoW): A consensus mechanism that requires computational effort to validate transactions, sometimes connected to liquidity mining rewards.
- Rebalancing: The process of adjusting the asset allocation within a liquidity pool to maintain a desired ratio.
- Reward Distribution: The method by which rewards are distributed to liquidity providers, based on their share in a liquidity pool.
- Risk-Return Ratio: The balance between the potential reward and the level of risk involved in a liquidity mining strategy.
- Staking: Locking up a certain amount of cryptocurrency in a wallet to support a blockchain network or protocol, often part of liquidity mining.
- Stablecoin: A type of cryptocurrency pegged to a stable asset, such as the US dollar, often used in liquidity pools to reduce volatility.
- Token Farming: Another term for liquidity mining, referring to earning governance tokens by providing liquidity.
- Token Pair: A combination of two different tokens in a liquidity pool (e.g., ETH/USDT), allowing for cross-token trading.
- Uniswap: A popular decentralised exchange protocol that uses automated market makers for liquidity mining.
- Volatility: The extent of price fluctuations in a cryptocurrency asset, which can affect liquidity mining strategies.
- Whale: A user or entity that holds a large amount of a cryptocurrency, potentially affecting the liquidity of a pool or market.
- Yield Farming: A similar concept to liquidity mining, where users provide liquidity to earn rewards, usually in the form of native tokens or governance tokens.
- Zeroth Party Data: Data provided by the user in a transaction, often for personalised rewards in liquidity mining protocols.
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