LM value: Although Defi brought a big bubble in June to August, it also shows its value-the tokens for liquidity mining rewards are like "interest", which is for many people with almost no bank interest. For users in countries (such as Japan), it means more possibilities.
LM mechanism: Although the recent liquidity mining has ceased to excite the community enough, the LM design idea is very worthy of being applied to subsequent token design, just like the halving mechanism of BTC and the stake mechanism of EOS are also constantly being used by various projects The adoption and even the mechanisms that have caused waves such as transaction mining and FOMO3D are worthy of continuous study.
LM worries: However, the current LM tokens as "interest" lack the support of profits. Although governance rights also have consensus value, more people will recognize the actual profits. ChinaDeFi is working on a solution to this problem.
A distinction should be made between the innovation of the two lines of asset issuance and asset processing (DeFi narrow interpretation) . In terms of classification, liquidity mining is more biased towards asset issuance. After all, Fcoin was actually running without borrowing DeFi.
The following is the development of my symbolic demo asset issuance.
Bitcoin monetizes people’s trust in encryption algorithms, while limiting the total amount of money, indirectly unifying the two characteristics of equity and currency
The ERC20 contract on Ethereum makes it unnecessary for everyone to develop a public chain just to issue a coin
Centralized exchange IEO circumvents regulation
UMA completed the successful demonstration of IUO on Uniswap. There is no high cost of listing on a centralized exchange. The automatic algorithm of volume and price combination of binding curve is enabled, so there is no need for market makers.
Compund's liquidity provides mining, which binds profitable business growth and token issuance.
YFI is distributed fairly. The proposition of who has the final say is reconstructed.
Bitcoin is not just a string of hash values, and cryptocurrencies are not just equity in crypto startups. After ten years of development, encrypted assets have accumulated some unprecedented asset characteristics. This is the innovation of generations of asset issuers. The above will only make encrypted assets less and less like traditional equity.
Innovation continues. Is the value of tokens more diversified? Or make the community more attractive? In addition to measuring liquidity on the blockchain, can it also measure other contributions?
The testnet plan recently released by Optimism includes
Liquidity Mining (LM) was first launched by IDEX in October 2017, improved by Synthetix in July 2019, and attracted large-scale attention by Compound in June 2020. LM as a better distribution token The mechanism is adopted by hundreds of protocols.
The above is a summary of some liquid mining projects since June 2020
The impact of this on Defi is exciting. As of the writing of this article, liquid mining has locked a total value of 10 billion U.S. dollars, compared to only 1 billion U.S. dollars on June 16, 2020. This has also put pressure on the Ethereum network. As the currency price rises, users are vying for benefits, and gas fees and transaction fees have reached the highest levels in history. Although this enthusiasm is reminiscent of the ICO bubble in 2017, the fundamentals are clearly stronger this time.
Here, we will explain what liquid mining is, why it works well, and what can be improved? This direction is currently developing rapidly, and I hope to capture most of the interesting progress and provide information for developers and users.
Liquidity mining 101
Liquidity mining is a network participation strategy in which users inject funds into the protocol in exchange for tokens of the protocol itself.
Jake Brukhman of CoinFund mentioned this term a few years ago. He discussed "generalized mining" in the context of supply-side network participation. The difference between liquidity mining is that the network has a demand for liquidity. Users do not need to purchase tokens to get token rewards. This token is usually a governance token that allows holders to control protocol parameters. Voting includes the value acquisition mechanism. Many people call it "yield farming". Yield farming does not necessarily require tokens. For example, liquidity providers can gradually obtain transaction fees on Uniswap as income.
Not all liquid mining projects are fair. The projects released in recent months can be divided into three categories:
Drawing according to some project data
Source of data above
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Fair issuance : The main purpose is to distribute most of the tokens through some standards (such as becoming an active user of the protocol) instead of selling them directly, so as to ensure that everyone has equal access to the distribution rights, similar to Uber is actually owned by drivers and riders.
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Equity distribution : The main purpose is to gradually realize community governance and minimize management funds. Imagine it as if Uber signed a legal agreement agreeing to allocate most of its stock to drivers and riders in the future.
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Market growth : The main purpose is to stimulate specific user behaviors in the early stages of the project. Similar to Uber, it reduces the mileage of some customers in the form of stocks.
Each method has its own advantages and disadvantages. The agreement may adopt a mixed mechanism. For example, Uniswap maintains an annualized 2% inflation rate for the distribution of equity. The best mechanism actually needs to be designed according to the development goals of the agreement.
Liquidity mining is important because:
- The scope of issuance is wider : the 2017 ICO made many retail investors angry. Many of the tokens in the private placement round were sold to these retail investors, resulting in losses. Liquidity mining attempts to be carried out more equitably, providing investment institutions and retail investors with equal opportunities to own protocol tokens.
The proportion of top 10 addresses held, YAM and YFI are more fair
- Closer integration : The advantage of liquid mining is that the holder of the token is more likely to be the actual user of the agreement. 0x proved this point through liquidity mining at the end of 2019. The data source in the figure below:
2019/10/30 historical data
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Governance is broader : users who hold tokens are more motivated to promote the success of the agreement. By sharing the possibility of revenue growth as early as possible, the liquidity mining program enhances community participation and helps the protocol start or transition to DAOs.
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The experiment process is faster : in Defi, liquidity = availability. The characteristics of liquid mining lead to the appreciation of tokens, thereby attracting more capital inflows, forming a positive and rapid cycle, and lowering the threshold for the team's new projects to gain market attention. Of course, this mechanism will also lead to a downward spiral-just like the BTC price falling to a certain level will cause miners to stop, it will cause miners to withdraw funds from AMM or borrowing pools. This cycle accelerates innovation and produces value that cannot be ignored in the industry.
The part that works well
In the past four months, in hundreds of liquidity mining experiments, although it is easy to fail, there are also many designs that are successful. These are worthy of being incorporated into future iterations.
Long-term liquidity reward
Many of the funds in the LM agreement belong to the category of "loyal capital", not loyal to the agreement itself, and always chasing the most profitable opportunities at the time. Just as some users register for each new takeaway platform just to get free food, the value of short-term liquidity is much lower than that of long-term liquidity, and LM plan upgrade should pay attention to this.
Ampleforth solved this problem by adding a "time multiplier" mechanism: different rewards based on the length of the deposit. The reward starts from 1x on the 1st day, becomes 2x on the 30th day, and becomes 3x on the 60th day. Therefore, many people are willing to wait 2 months before withdrawing funds.
Although the retention rate of funds varies, the overall outlook is optimistic. AMPL's project update on August 4 (the 43rd day of the project) showed that 6,036 independent users tried to obtain Geyser, and 4242 users were still active that day. According to unconfirmed internal information, on September 8, there was approximately US$9.5 million in the AMPL-WETH pool with US$83 million in deposits as liquid funds.
Adjustment parameters
Liquid mining projects should not be a “one-and-for-all” job. Although the developers of these protocols have made their best efforts to predict these liquid funds, they still need to make constant adjustments.
Balancer has made an excellent fine-tuning of its LM plan, adding 5 parameters to stimulate liquidity:
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ratioFactor : Penalize pools that provide traders with less valuable liquidity.
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feeFactor : Punishes high transaction fees because they make the transaction pool less attractive to transactions.
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wrapFactor : Penalize trading pairs of highly correlated tokens because they bring less valuable liquidity to the Balancer.
Facts have proved that the rapid adjustment of Balancer has resonated with liquidity providers. Before the start of the plan on June 1, the number of independent liquidity providers was 115, and that number jumped to 71 on June 1 without a U-turn. The independent LP range in September is 8611517.
Data source: Balancer Dashboard
Cross-protocol community participation
Liquid mining projects are not a vacuum operation-liquidity providers will actively evaluate the opportunity cost of participating in the project and find effective ways to join the community.
YAM has done a good job at this point. It has launched 8 liquidity pools, including the most active Defi project token in the market, YAM v1:
YAM's growth is impressive—before the contract bug appeared, he had locked in more than 500 million US dollars in liquidity within 24 hours:
Continuous product innovation
The liquidity mining program of the sub-agreement cannot be a better contract. Compound, Curve, and Uniswap have done a good job in this area. There are products with certain functions before the online liquid mining, which also makes people want to participate in mining first.
In addition, protocol forks should not only focus on removing the distribution of founders and investors, but should add utility to the protocol in a meaningful way that is different from competitors. Pickle Finance is the best product roadmap to do so far. The product roadmap includes several novel production income investment strategies, as well as the final stable currency arbitrage strategy, which aims to maintain stable currency at a fixed exchange rate. Base is also actively developing its roadmap, which includes a DEX and fair launch platform.
Shorter duration
LM that lasts longer will easily lose flexibility in responding to market changes. Even if many people think that a longer duration is more conducive to the distribution of tokens, in fact, this distribution can be done in the open market based on the preferences of buyers and sellers.
Another advantage is that sufficient liquidity is introduced to the market so that market prices can be formed more effectively. For a long-awaited project, if you start to adopt a liquid mining plan, those who enter early may have the possibility of investment loss due to the small liquidity, thus hurting the community.
The YFI issuance is an extreme case. It only took 9 days to distribute 100% of the tokens. From the perspective of market structure, sellers have little pressure because there are no previous holders, which forms a virtuous circle. All token holders get the greatest financial benefits. YFI currently has 13,507 addresses and has the most dynamic and engaged community in the industry.
For projects that choose the LM mechanism to last longer, a balance needs to be struck, because the early liquidity value is greater than the subsequent ones. If the BTC block reward is halved, the LM can have a decay function. The reward function will be higher in the previous days or weeks, and will gradually decrease. Sushiswap is excellent at this point. By accelerating the distribution speed by 10 times in the first 2 weeks, it achieved a peak asset lock-in of US$1.5 billion, accounting for about 73% of Uniswap's liquidity.
Longer attribution
For longer-lasting LM projects, there may be an attack, and other LM protocols (Yearn yVaults, Harvest Finance) that do not intend to hold the project for a long time can also participate in mining. This lowers the rewards for people who want to participate in the project for a long time. Rewards for holding time will reduce the possibility of such attacks, so these arbitrage funds will think twice before participating in the project.
Attribution also provides more time for information dissemination, which can help shape the price by allowing token holders to determine whether project tokens are worth holding for a long time.
DODO made a brave decision in its LM mechanism. After it completed the first week of liquidity mining, the remaining part was discovered within the next 6 months. Even with these restrictions, DODO still has more than 3,100 addresses locked in liquidity of US$84 million.
Multiple performance indicators
Many agreements have launched LM without a clear purpose. They don't know the specific behaviors they want to encourage, and they don't have a measure of the value of the project itself. Ideally, the project party needs to know that “to allocate x% of the tokens for a duration of y weeks can bring $z liquidity to the agreement”, and can calculate the acquisition cost and liquidity per unit of the agreement. Sexual ongoing costs.
UMA's LM plan is very well done. For specific pools, these questions will be raised for a fixed period of time:
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What percentage of mining unions immediately sell their mining reward tokens?
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What percentage of miners use tokens to vote?
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What is the degree of dispersion?
This project was very successful in attracting US$20 million in ETH and provided the team with some important data, such as "daily liquidity cost"-the liquidity cost per million US dollars is less than US$1,000 to US$4,500.
Fairer participation
Nowadays, most LM mechanisms benefit those who hold a large amount of principal and damage the participation of the community and the distribution of tokens. Based attempts to solve this problem by setting an upper limit of $12,000 for each address. Pickle also tried to solve this problem through a second vote to prevent the asymmetric influence of whales on governance decisions. Although we don’t know whether the whale created multiple addresses to participate in voting, this is at least a step in the right direction.
Supply restrictions
I believe that projects that want to develop in the long term should not be limited in supply. These agreements are more like companies than currencies, and no company will restrict its ability to issue shares. In addition, due to the inability to innovate new LM plans, the agreement is more vulnerable to vampire attacks.
At the same time, the continued high inflation rate may harm the interests of all currency holders. At the same time, high inflation may intensify the attack dimension related to governance, which may have a serious impact on the entire Defi ecosystem. For example, if token X has an unlimited supply, adjustable inflation rate, and can become collateral on Compound, malicious voters may vote for an unlimited number of token X and steal all collateral on Compound. One solution is to hard-code some low-inflation tail tokens into the community management vault, or hard-code the option to include the final inflation, set the initial inflation rate to 0% and set the inflation rate ceiling.
common problem
In addition to the above suggestions, the LM plan needs to address several issues:
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Vulnerabilities : The LM project may give users arbitrage loopholes to exploit. For example, on Compound, recursive lending may cause false transaction volume and cause congestion. Based on unconfirmed estimates, this part may exceed 30% of Compound's published supply (for example, if the supply is $1 billion, $700 million of which is non-recursive). This behavior does not bring any value to Compound, because other users cannot access the liquidity.
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Technical risks : Security audits are expensive, but teams that want a fair issuance usually do not have the budget to pay for security audits. This may lead to bugs in the main network, which may result in damage to user funds. Fair Launch Capital tried to solve the issue of security audit fees through donations.
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Run away : Even if the contract has no bugs, most of the contracts are started anonymously, which brings convenience to scammers. Malicious behaviors can use contracts, such as calling mint() functions such as Hotdog, or simply selling Yuno to achieve their goals. More technically savvy users can use Diffchecker to detect these attacks, but this is very dangerous for retail entrepreneurs.
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Information asymmetry : Although the purpose is fair distribution, insiders can participate in LM in the first few minutes and hours, resulting in unfairness to retail participants. This problem can be resolved through more adequate notification.
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Gas fee : The high Ethereum Gas fee prevents participants with small funds. This damages the distribution of tokens and reduces the value of items such as NFTs and games.
in conclusion
Although a lot of experiments have been conducted, it seems that we still haven't found the best token distribution model. Everyone needs to note that although many current liquid mining projects seem to be successful, we still don't know what will happen in the long run. We need to observe at least 6-12 months.
Welcome to exchange, and continue to pay attention to the projects at home and abroad that are really working hard to create value for the blockchain world.
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