They seek to measure how many dollars in token rewards a protocol is paying in order to attract how many dollars in deposits. You should start from thinking, ‘What do we want out of this? What’s some kind of target liquidity we want in our protocol?’ And once you reach it, there should be no further rewards.”īy contrast, the new crop of projects harnessing liquidity aims to make payoffs more transparent. “Why? Because, for me, there is absolutely no strategic thinking behind it. “I think liquidity mining is one of the dumbest things happening right now in crypto,” said pseudonymous Deribit Insights researcher Hasu on a recent podcast. “Liquidity is one of the two most important resources in this new world, and whoever controls liquidity controls DeFi,” said Santoro.įrom the perspective of protocols looking to bootstrap usage, at first liquidity mining seemed like the future of how projects would find product-market fit.ĭuring 2020’s DeFi Summer, Compound kicked off the craze by bolstering the returns on deposits to its lending platform with COMP token rewards, and protocols like Sushi managed to briefly overtake rival Uniswap on the back of similar incentive programs.Ĭritics, however, have recently pointed out that while directing a fire hose of rewards at users will certainly incentivize deposits in the short term, liquidity mining is an imperfect tool that also attracts what prolific DeFi developer Andre Cronje has referred to as “liquidity locusts” – temporary “farmers” who take their rewards and leave for the next geyser of tokens when the current one runs dry. Regardless of whether liquidity as a service turns out to be a narrative fad enjoying a temporary pump in crypto’s notoriously fickle attention economy or a new bedrock of on-chain market structure, at the moment at least, the arms race to control the flow of deposits in DeFi is, in essence, a battle over large swaths of the $230 billion sector itself. Others, such as angel investment collective eGirl Capital’s pseudonymous Cryptocat, believe that the liquidity trade is a passing trend. Whoever controls liquidity controls DeFi. When you translate that to DeFi, you need value services – lending platforms and AMMs – and you need value storage, and that’s liquidity management.” “The way I frame it is that the internet is commanded by services and storage for information – cloud compute and data storage. “Liquidity is king,” Fei Protocol co-founder Joey Santoro told CoinDesk in an interview. In spite of a broader market rout, protocols focused on channeling liquidity are catching a healthy bid.Īccording to some, the trend is part of a broader one in Web 3, where value can be harnessed and commodified much like information on the internet. What’s a more precise approach?Īs the new year gets underway, projects working on solving this quandary are some of the most popular among traders and investors. These efforts are also united in that they attempt to answer a deceptively simple question: until now “free” money has been the animating factor behind DeFi adoption. In recent months, however, liquidity mining has come under fire for being an imprecise incentivization tool often attracting mercenary farmers.Īs a result, a range of novel new services such as bonds, time-weighted voting systems and DAO-to-DAO-focused stablecoin issuers have emerged to replace it – a broad range of advancements with the potential to permanently alter how DeFi protocols attract fresh deposits.ĭepending on the project, the mechanics at play might be referred to as “liquidity as a service,” “protocol controlled value” or even “DeFi 2.0,” but in all instances, the basic principle is the same: to manage and direct vast sums of capital via incentive mechanisms. The primary driver behind 2020’s “DeFi Summer” craze, liquidity mining refers to the practice of a protocol incentivizing user deposits with token rewards. Liquidity mining is dead, and trying to figure out the best way to replace it is the focus of one of crypto’s hottest subsectors.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |