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Where UnoFarm generate yield from?
UnoFarm is currently helping to generate income primarily by providing liquidity to so-called liquidity pools. This process is sometimes called liquidity mining.
Liquidity pools are smart contracts based on Automated Market Making (AMM) technology. They are mostly used in decentralized exchanges (DEX).
A pool is typically a pair of tokens that are used to conduct trades on the DEX. During trading, DEX users pay commissions, most of which go to the liquidity pool and are distributed among its participants, in proportion to the funds placed.
The user who provides liquidity to the pool receives LP tokens. They work like an investment unit and confirm that liquidity has been provided to the pool. When liquidity is withdrawn, they are burned.
Many DeFi protocols also additionally reward users with their own tokens. This is usually done to provide an incentive to provide liquidity to specific assets.
Thus by providing liquidity (depositing tokens in the pool) user receives:
- 1.LP token, which confirms the provision of liquidity.
- 2.Trading commissions a AMM, proportional to the deposited funds.
- 3.Additional DeFi protocol tokens on which liquidity is deposited.
UnoFarm uses a special reinvestment mechanism, selling these additional tokens at an optimal frequency. They are sold and exchanged for the base tokens in which liquidity is initially provided. Then they are added to the liquidity pool, increasing the user's share in it (the number of LP tokens) and, as a consequence, amount of the trading commissions he is entitled to.
Thus, the compound interest allows to greatly increase the profitability of providing liquidity using the UnoFarm protocol.