Key Analytics to Provide Liquidity in DeFi

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One of the most common ways to earn yield in DeFi is by providing liquidity in decentralized exchanges. While for new investors this may seem initially as a straightforward process to earn returns, providing liquidity successfully has more intricacies that one should be aware of. There are certain indicators that can help to make more informed decisions about which pools are the most convenient to provide liquidity.

First, it is key to understand where yields are coming from. Trading fees are paid by traders that use these liquidity pools as a service to transact between the underlying two coins. Most pools have yields that are sourced exclusively from these fees. But the source of yield can also come from liquidity mining programs, where certain tokens are issued as a reward to those that provide liquidity in certain pools. These tokens are issued by protocols that have an interest in a pool maintaining a fair amount of liquidity to accommodate trades and damp volatility on the price of the token. This way they periodically pay liquidity providers a fixed amount of coins for providing liquidity. These incentivized pools are usually labeled as ‘farms’.

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