A cold knowledge: the inventor of the term liquid mining, the first adopter, and the promoter of this concept are three different projects.
Written by: Pan Zhixiong
A year ago, to the center of the financial (DeFi) began to receive widespread attention encryption currency communities, but the impact if there is no “liquidity mining” (Liquidity Mining) and “earnings farming” (Yield Farming) concept, DeFi ecology may not There will be such a rapid development in this year, and it is very likely that there will be no later ” DeFi Summer “.
Looking back on the achievements made this year, the development speed of the DeFi ecosystem is beyond imagination. Just a few examples of data can be found to be hundreds of times. For example, the amount of borrowed funds has increased by 170 times, and the number of transaction users has increased by 140 times. The total amount of assets in DeFi’s smart contracts has increased by 140 times, and so on.
Although the term “liquid mining” was neither invented by Compound nor the first mechanism they adopted, Compound is the most important promoter of this matter. The information about liquid mining that can be searched on the network is almost always after Compound launched ” Lending is Mining “. From this point of view, it is exactly one year away from now.
Since then, liquidity mining has become the most worthwhile mechanism in the initial stage of the DeFi protocol, and has even become a set of standard “templates”. Many projects will be based on this set of templates plus fine-tuning of their own characteristics.
The users participating in “liquid mining” are divided into two categories:
One type is a big whale or machine gun pool that “digs, sells, and withdraws”, which directly sells the token rewards obtained for cash;
The other is for users who are looking forward to participating in the distribution of tokens in the primary market through this type of mechanism, and they can grow together with the project through this mechanism.
The negative point of view is that the risks of “mock dolls” brought by this mechanism (such as mutual mining between protocols) may increase the system risk of the entire DeFi ecosystem, and the distribution method may also be excessive if it is not precisely designed. The growth of early overdraft agreements . Just as Uniswap stopped after trying several liquidity mining activities, it has not launched any new activities until the release of the V3 version. Perhaps it is also designing a more reasonable solution.
In any case, this mechanism is a good mobilization of the enthusiasm of the cryptocurrency community and users to participate in the DeFi protocol, and it has become an indispensable part of all new projects.
On the one-year anniversary of the prevalence of liquid mining, we hope to review from the data what achievements the DeFi ecosystem has achieved during this year, and what impact it has caused. It must be pointed out that the rise of DeFi is completely driven by “liquidity”. “Mining” is a factor, but it must be one of the most important factors.
Who invented the term liquid mining?
To explore the earliest source of the term Liquidity Mining, the available source is the open source automated trading tool Hummingbot . Everyone started using this vocabulary in June 2020, and the Hummingbot team was more than half a year earlier than this.
Hummingbot is a tool that is biased towards professional users, so ordinary users may not know it.
The team first announced the “launch of liquid mining function” in the blog on November 1, 2019, and later added related functions in the 0.20.0 version in December, and then 0.23.0 in February 2020. Beta testing was opened in the version, and the centralized exchanges and decentralized exchanges that were initially supported were Binance and 0x Mesh respectively.
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In the earliest definition of Hummingbot, “liquid mining” specifically refers to providing liquidity for exchanges. Later, the DeFi industry further generalized the concept of this term and can be used in lending or other financial applications, because these services also require One party provides liquidity. And later gradually evolved into yet another new term: “Revenue farming” (Yield Farming).
Hummingbot’s definition of “liquid mining” is very precise and complete. Here you can enjoy their explanation:
“We call this matter “liquid mining” because its concept is very similar to PoW mining. Compared with the use of mining machines and electricity, liquid mining uses computing resources and token inventory to run Hummingbot. Market-making client. By competing with other participants to obtain economic incentives, their joint efforts can achieve a common goal of providing liquidity for specific tokens and exchanges. In return, they will follow the algorithm-defined model, Get compensation commensurate with their work.”
The Hummingbot team also simultaneously released a white paper called “Liquid Mining” with more specific details. The completion date of this version of the white paper is October 30, 2019.
Which DeFi project was the first to adopt liquidity?
The earliest DeFi protocol to adopt a liquid mining mechanism may be Synthetix , a synthetic asset protocol. They launched a liquidity incentive activity as early as February 2020, which was nearly 4 months earlier than the DeFi boom that started in June 2020.
Reference reading:
Synthetix did not use the term “liquidity mining” at that time, but called it ” LP reward system “, where LP is the abbreviation of liquidity provider, and later they also used ” liquidity incentive test ” and the like To describe liquid mining activities.
In terms of mechanism, the incentive activities launched by Synthetix are similar to the subsequent liquidity mining. The first activity is to reward users who provide synthetic asset liquidity on Uniswap. The first supported trading pair is sETH/ETH.
Of course, the complete link to get rewards is quite long: users first need to mortgage SNX in exchange for sUSD, and then after the transaction is sETH, they also need to match the same amount of ETH to provide liquidity in Uniswap and obtain “LP tokens”, Finally, the LP tokens are pledged in Synthetix’s smart contract, and SNX can be received as a reward in the future.
Who ignited the liquidity mining boom?
Although the early liquidity mining is more of transaction-related scenarios, it is actually due to the decentralized lending protocol Compound that promotes the prosperity of liquidity mining .
Compound officially launched the distribution method of governance token COMP during June 2020, and for the first time on a large scale let other DeFi protocols realize that they can use their own governance tokens to promote the liquidity growth of the protocol.
The mechanism is relatively simple. As long as users routinely use Compound’s lending protocol, they can allocate a certain amount of governance token COMP according to the amount of borrowed funds. Of course, this mechanism has been adjusted many times later.
It is attributed to the fact that Compound itself is a large-scale and influential project in the DeFi protocol, and there has been no plan to disclose its native token before, so when the community learned that Compound had launched a “government token with no actual value”, everyone All in crazy discussion and research.
At that time, Compound and the community did not call their mechanism “liquid mining”, but this did prompt other projects to use the “liquid mining” mechanism. If you search for the term “liquid mining” on the chain, you will find that the time of this word appeared before and after Compound disclosed their token distribution mechanism. This should not be a coincidence.
Based on various reasons, this event of Compound is a very landmark event, which led to the DeFi boom in the following months, which overseas communities also call ” DeFi Summer ” (DeFi Summer).
Is liquidity mining the same as FCoin’s “transaction mining”?
I remember that shortly after the launch of the liquid mining concept, there were many voices in the Chinese domestic community that it was actually the same as the ” transaction mining ” launched by FCoin in 2018, and some even believed that it launched the “transaction mining” FCoin. It is the originator of “liquid mining”.
In fact, the core difference between these two concepts is still very obvious. The “liquidity mining” realized by the blockchain based on the transparency of transaction data can ensure that the entire process is auditable and traceable . The main reason why FCoin failed to sustain it is its chaotic centralized management and the assets under custody. The status is also not transparent enough .
More importantly, although the mechanisms adopted by the above three projects (Hummingbot, Synthetix and Compound) are ultimately called “liquid mining”, they are essentially different mechanisms. Among them, the Hummingbot scheme is similar to FCoin. Transaction mining.
Data speaks: DeFi this year
Total lock-up amount (TVL): 140 times
The total lock-up volume (TVL) is a core indicator to evaluate the liquidity and capacity of the DeFi ecosystem, that is, how much real money and silver assets you put into the DeFi smart contract to increase the scale of the entire system.
With reference to DeBank’s data, as of June 1, 2020, the total lock-up volume of all DeFi at that time was US$940 million, and the highest peak was May 11, 2021, when the total lock-up volume was US$131.4 billion. The growth is close to 140 times within.
Total borrowing: 170 times
There is a type of agreement in DeFi that specifically provides over-collateralized lending services, and its total borrowing volume can reflect the mortgage and borrowing scale of this type of agreement.
Calculated on June 1, 2020, the total amount of all DeFi borrowings at that time was 150 million U.S. dollars, and the highest peak was May 9, 2021. The total borrowing at that time was 26.7 billion U.S. dollars, an increase of more than 170 times within one year. .
Number of trading users: 140 times
The transaction protocol is also the most important facility in the DeFi ecosystem, so the number of users using the transaction protocol (calculated by independent addresses) can reflect the user scale of the entire DeFi ecosystem.
Calculated on June 1, 2020, the number of users of all DeFi transaction agreements on that day was more than 6,200, and the highest peak was May 11, 2021. The number of transaction users on that day was 850,000, which was close to growth within a year 140 times.
Transaction volume: 1000 times
For transaction agreements, transaction volume is also a very intuitive standard. Especially since the Binance Smart Chain (BSC) went online this year, the transaction volume of the transaction protocol within the network has increased exaggeratedly.
Calculated on May 31, 2020, the transaction volume of all agreements on that day was 22.3 million U.S. dollars, and the highest peak was May 29, 2021. The transaction volume on that day was 23 billion U.S. dollars, an increase of more than 1,000 times in a year.
Gas Price: Up to 18 times
In fact, before DeFi Summer, Gas Price, which marked the price of the Ethereum network, had grown significantly, from a single-digit GWei level to a few dozen GWei levels. However, after the start of liquid mining, Gas Price is still growing rapidly, and only recently has a downward trend.
According to Blockchair’s data, on June 1, 2020, the median Gas Price for that day was 30 GWei, and the highest peak was September 17, 2020. The average gas price for that day was 544 GWei, an increase of 18 times in three months.
Interestingly, on September 17, 2020, Uniswap announced the issuance of governance tokens and airdrops, so a large number of on-chain transactions for receiving UNI airdrop tokens occurred on that day.
Block capacity: increase three times, a cumulative increase of 50%
Unlike Bitcoin, the block capacity of Ethereum can be adjusted according to the votes of miners , so as the physical network, computing, and storage resources increase, miners can choose to continuously increase the capacity and throughput of the Ethereum network. .
Before June 2020, the gas limit of each block of Ethereum was 10 million GWei, which increased to 12 million GWei from June to July, and again to 12.5 million GWei at the end of July.
Until April this year, the block capacity was once again increased to 15 million GWei, an increase of 50% compared to the same period last year.
Stable currency issuance: 10 times
The demand for stablecoins has also increased significantly. From the US$7.3 billion stablecoin issuance on June 1 last year to today’s US$70.5 billion, it has increased nearly 10 times in one year.
BTC cross-chain currency issuance: 48 times
With the development of DeFi, the Ethereum network’s demand for BTC has grown rapidly. After all, this is also a native encrypted asset with a very large user base and market value.
The issuance of BTC anchor coins has increased from 5,200 BTC on June 1 last year to 250,000 BTC today, a 48-fold increase in one year.
Number of oracle calls: 500 times
The oracle did not get large-scale application before the rapid development of DeFi, but since last year’s DeFi Summer, the demand for the oracle has also changed dramatically.
Calculated on June 1, 2020, the number of oracle calls on that day was 72, and the highest peak was December 18, 2020. The number of oracle calls on that day was close to 40,000, an increase of more than 500 times in half a year.
How will DeFi continue to grow?
Recently, we have seen the decline of the cryptocurrency market. One of the most obvious indicators is that the Gas Price is declining, and other data have also declined in various degrees. Does this mean that the DeFi ecosystem of Ethereum has reached the ceiling?
In fact, from the data point of view, the current DeFi ecosystem is still a baby. Although the TVL of Ethereum has now fallen to a scale of 56 billion U.S. dollars, more assets have not yet entered the DeFi ecosystem .
To make a simple calculation, if you add: “The market value of Ethereum + the market value of stablecoins and BTC on the Ethereum chain + the market value of the 5 largest projects on the Ethereum chain (UNI, LINK, MATIC, AMP, AAVE)” , This scale is about 400 billion U.S. dollars. In this way, 56 billion US dollars is only 14% of 400 billion US dollars, which does not even include the thousands of long-tail tokens on the Ethereum chain.
In addition to the scale of assets, the current Ethereum is limited by throughput, and many transaction applications are also experiencing growth bottlenecks because they are “too expensive” and “too slow.” Although the block capacity has increased by 50% this year, it is still far from being cheap and easy to use.
Fortunately, in the near future, various new-generation Layer 2 (Layer 2 network) protocols have been or will be launched, which will also become the core foundation for the next growth of DeFi. Under the new infrastructure, there will be some more interesting mechanisms than “liquid mining”, which is worth waiting to see.
