Liquidity mining is an innovative model of earning passive income through Defi applications, usually by providing liquidity.
Although liquidity mining provides investors with a high rate of return, the various risks involved in this process cannot be ignored. These risks include but are not limited to:
Smart Contract Risk
Smart contract code is immutable and behaves exactly as specified. However, it is also because if a smart contract has human or non-human vulnerabilities, it can be exploited without recourse. While things like this are uncommon, they do happen, and they happen all the time.
Smart contract auditing mitigates the risk of loopholes in contract code to a certain extent. At present, the main players in the field of contract auditing include Trail of Bits, Zeppelin, Quantstamp, etc. However, it should be noted that the contract cannot be guaranteed to be 100% safe through auditing, and risks should be carefully assessed before investing.
Mortgage liquidation risk
If you use a collateral loan on a platform such as Compound, MakerDAO, or Aave, when your collateral is no longer sufficient to cover your loan amount due to the volatility of the borrowed assets or collateral, the automatic liquidation (sale) of the collateral will be triggered, and additional associated costs.
risk of impermanent loss
If you provide funds to any automated market maker (AMM) based decentralized exchange such as Uniswap, you may lose a lot of money when the market changes suddenly and dramatically and the price fluctuates wildly. (The simple understanding is that the number of assets with higher value will decrease rapidly)
