Where are the fundamental stakeholders in DeFi liquidity mining and who makes whose money?
Original title: “Quick Understanding | DeFi Liquidity Mining Interests and Risk Analysis”
Written by: Future Brother
The recent liquidity mining boom brought by Uniswap on DeFi has become a sudden hot spot in 2020. Even at the beginning, few people were discussing various gameplay methods such as Uniswap, Ampleforth, Compound, YFI, Curve, Sushi, etc. And potential. With the gradual increase in the number of participants and the increasing number of inquiries, today we will analyze where are the fundamental stakeholders in DeFi liquidity mining, and who makes whose money? Who took whose plate? Here we go:
First of all, we must understand a concept, what is liquidity mining (Liquidity)?
ASIC mining machines such as BTC and ETH, graphics cards and other mining are to provide computing power for the network to maintain the network and obtain block rewards. In recent years, the computing power of the entire network has increased, and the difficulty has increased, and the proportion of personal equipment in the computing power of the entire network has plummeted, resulting in a decrease in mining efficiency. Therefore, a model of centralized computing power such as mining pools, hosting and other modes of making money together (pay attention to understanding here, Liquidity mining actually has a similar yield model curve)
PoC such as Filecoin maintains the network through computing capabilities such as hard disk graphics cards and providing hard disk storage capacity to obtain block rewards. The logic is similar to PoW mining, except that the computing power is changed to storage power, and other hardware is used to increase the performance of the equipment.
Therefore, in the same way, liquidity mining is to provide the entire ecosystem with liquidity (the amount of mortgage LP tokens) that can be traded, so that the transaction exchange is smoother and smoother, so as to obtain rewards. It can be simple Understand as a kind of market maker.
Therefore, the essence of the three is to provide greater help to the network ecology to obtain rewards. From this point of view, it can also be seen that in the BTC, ETH, and PoC ecosystems, the very early individuals and large-scale The participating miners and large-scale institutions may be the biggest beneficiaries of benefits.
Thinking of liquidity mining in a more understandable way, it can be understood as those individuals and merchants that provide users with USDT, BTC and other asset exchanges in OTC platforms similar to centralized exchanges. There are many merchants from large platforms, and users can also exchange It’s smoother, faster, and the spread is smaller. On a small platform, when there are fewer market makers, the amount that users can exchange is smaller, and the price difference is greater. These merchants earn the intermediate price difference through the spread of buying and selling, but this price difference is not too big for each individual user, so the user experience will be very good.
This model is actually the original intention of the founders of YFI, Curve, etc., through aggregation to select the best interest pools, and provide liquidity for these pools, so as to obtain rewards such as transaction fees and corresponding tokens. But the inexplicable madness of these DeFi tokens has gradually evolved into a joyous and sad feast that soars and plummets. It really closes your eyes temporarily , a cup of respect for “freedom” and a cup of respect for “death”, the atmosphere begins to heat up, and it is dangerous. And charming, really wanna dance tonight, feel a little bit dangerous.
Steps to participate in liquidity mining
Taking Uniswap built on Ethereum as an example, the basic simple steps are as follows:
- Buy ETH tokens (Huobi, etc.) on a centralized exchange
- From the exchange to the online wallet supported by the platform, metamask (little fox), coinbase wallet, etc.
- After connecting the wallet to the Uniswap platform Connect, click on liquidity, select the currency you want to participate in, and look at the ratio you want to participate in and the number of tokens you need (the picture below takes Sushi as an example)
- Through Uniswap, convert ETH, etc. into the corresponding amount of the currency that you want to provide liquidity (Sushi, USDC etc.), if you can’t find the currency, then paste the contract address into the currency
- After success, click Liquidity again to participate in liquidity mining according to the proportional demand, deducting the handling fee and the like.
- After successfully adding liquidity, the so-called UNIV2-LP token is generated. After approve these LPtokens in corresponding platforms such as sushiswap, participate in mortgage staking and complete the configuration of liquidity mining.
Note: Do not transfer coins directly from the exchange to the contract address of liquid mining (without going back).
We can see that it seems that the steps are not particularly complicated, but small problems are often encountered on the way, such as congestion pending, and the handling fee is expensive to a small step of about 15$. Decentralized platform, very little guidance information, etc. If a step is wrong, you may not know where to go to your currency. After a process goes down, the handling fee is estimated to be deducted about 100$.
Benefit analysis of participating in liquidity mining
From the above table, we can clearly see the role of each different role in liquid mining and the source of profit. Basically, the biggest profit point is that the big mining companies and large institutions may secretly start early. The digging project side is here. As for the source of profit, it must be the cash flow brought by the after wave of the market. In fact, the receiver knows that he may be buried in the market, but he also participates in this feast with a mentality of speculation and that I am not the last wave. .
If we look back at the previous example in our article, market makers actually earn stable spreads and fluctuating fees and win by volume, so why does DeFi-type liquidity mining cause such large currency appreciation and fluctuations? Personal feeling, mainly because of the following:
- The story is good, the concept of DeFi is indeed a brand new concept with a lot of room for imagination, it is difficult to estimate if you can imagine
- There are cognitive barriers. Even 13-year-old leeks may not understand how to play liquid mining. Leeks and newcomers in the secondary market are even more daunted. The FOMO mentality of watching the currency price starts
- Promoted by centralized exchanges, all major exchanges have basically launched DeFi observation sections, which has promoted investors’ attention
- The desire to make money FOMO hits, and everyone wants to get a piece of the pie, and all forces have contributed funds to participate in the experience
- Swap spreads are large and not very obvious. Direct flash conversion profit and loss is not as intuitive as K-line, which leads to more spreads.
Risk analysis of DeFi liquidity mining
Liquid mining is interesting but also very risky, because the cost of issuing DEX coins is very low, and a good story with many imitations and junk coins can attract many investors to participate in mining, and then run away within 24h-1 week. This is even worse than the grand ICO 17 years, because DeFi team could not find more, do not know who is doing behind press the Send button, chances are two ha, fully tantamount to eat Yaba Kui, the other music blossomed, even The basic moral hazard is gone .
The essence of liquid mining is to attract funds to increase the depth and volume of the transaction target, so that swap and transaction can achieve smooth and low spreads . The people who provide liquidity with the purpose of making money will also attract more profitable projects. After that, the attracting rhythm of the Ponzi scheme, because the profits given can already be annualized completely by the brain. . Anyway, how about 10,000 times annualization if you attract a wave and run away.
A good DeFi liquidity project can indeed enable transactions to be carried out quickly and easily above the DEX. You can use your own online wallet to perform swap transactions, so that individuals are exempted from the risk of having coins in third-party exchanges, and 100% control themselves Of assets to trade. But at the same time, it also increases the risk of losing all of your assets when your account is stolen. There is no third party to help you. (Do you dare to believe in completely decentralized insurance? Anyway, I basically don’t dare to believe it. I secretly leave a back door. Grinning).
So objectively speaking, DeFi’s liquid mining application is indeed a very good innovation, which increases the possibility and convenience of people participating in contributing and using it. However, if you are embracing speculation and getting rich, unless your resources and contacts are early enough, deep enough, and hard enough; otherwise, you should dispel this idea as soon as possible, at least at this stage, it is basically to take the order. In other words, liquidity mining is not something for Xiaosanwan, and the price of the handling fee can be seen. If you take a few ETH and have not started mining, you will lose a 10%-30% handling fee. Of course, some people got rich, and at the same time, more people stayed at the top of the mountain. Liquidity mining is basically about large households and institutions providing liquidity to make money. In the future, these people will also be important participants and resources for the development of new functions and new projects by the project party.
But, do what you want, hope is a good thing.
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