How liquidity mining works
Let’s say you want to tap into a liquidity pool on Uniswap, which is the oldest and largest DEX. This will be a multi-step process involving several different mobile apps or websites.
First, you need to own some digital coins. For this example, we’ll work with Ethereum and the Tether (USDT -0.00%) stablecoin. In most cases, the coins you’re putting to work can’t be held in your crypto trading service’s standard wallet. Instead, they must be transferred to a self-custody wallet, where you have direct control over the assets.
Then you go to Uniswap’s mobile app or browser-based portal to connect your wallet and add your tokens to the liquidity pool. Click on the “pool” button and then the “new position” link, select the Uniswap trading pair you want, and see how the rewards work out. Ethereum and Tether are one of the most popular pairings on Uniswap, so we’re going with those options.
You can pick one of several reward tiers tied to different interest rates charged to traders who actually make use of the digital funds you’re providing. Very common cryptocurrencies and stablecoins typically lean toward the lower end of the pool fees; rare and exotic coins often carry higher fees.
So let’s select the middling fee tier of 0.3%, as most Ethereum-Tether liquidity miners do on Uniswap. That usually gives you an APR in the range of 80% to 90%, although the exact value varies over time. What actually happens is that the group of liquidity miners gets to share the fees collected from traders on the DEX, and the shared haul grows larger as trading volumes increase. Therefore, a smaller fee can work out to a larger payout if that particular tier happens to be incredibly active on the Uniswap trading platform. A larger stake of locked-in liquidity gives you a bigger piece of the total pie.
Now it’s finally time to select the amount of Ethereum you want to lock up, which is automatically matched by some Tether tokens. Both tokens must be in your wallet, and the Tether to Ethereum ratio varies across the different fee tiers.
You collect your liquidity tokens, then sit back and wait for the rewards to roll in. Risky and uncommon token pairs usually offer higher rewards, while a pair of stablecoins might generate close to zero rewards.
