How to play this user-centric token distribution mechanism?
** Author: Dmitriy Berenzon, research partner of Bollinger Investment Group, a blockchain investment institution; the author authorized Lianwen to translate and publish the Chinese version of this article
Compiler: Perry Wang **
IDEX first started its business in October 2017, Synthetix improved it in July 2019, and then Compound was implemented on a large scale in June 2020. Liquid mining, as a better token distribution mechanism, has attracted Dozens of DeFi agreements use their imagination to blossom.
An incomplete list of liquidity mining plans launched between June and September 2020
The impact of liquidity mining on the DeFi field is exciting. As of this writing, the total locked-in TVC value of each DeFi protocol exceeds US$10 billion , compared to only US$1 billion on June 16, 2020. This also puts pressure on the Ethereum network. While users are pouring into DeFi for income farming to realize profits, the gas price and transaction fees have also reached the highest level in history.
Although this enthusiasm is reminiscent of the ICO bubble in 2017, the fundamentals of current DeFi projects are stronger.
In this article I will explain what is liquidity mining, what have success, what could be improved. With the rapid development of the DeFi field, I hope to record most of the interesting developments, which can provide useful information for the agreements that want to implement the liquidity mining plan and users who want to participate in liquidity mining.
Liquidity mining 101
Liquidity mining is a network participation mechanisms, in particular the principle is: the user agreement to provide funding in exchange for tokens native of the agreement.
This term was coined by CoinFund founder Jake Brukhman a few years ago. He discussed the concept of ” Generalized Mining ” in the context of the participation of various networks. Liquidity nuances of mining is that the network has specific needs that liquidity supply, users do not need to purchase tokens, and get bonus currency, tokens often a control token that allows the holder to Voting on protocol parameters, including value acquisition mechanism. Many people often refer to it as ” income farming .”
Although these terms are often used interchangeably, revenue farming does not necessarily require tokens—for example, a liquidity provider LP can obtain revenue from Uniswap through transaction fees alone .
Not all liquid mining plans are created equally. Looking at the newly launched agreements in the past few months, there are three categories:
Some items are not drawn to scale, data source: https://docs.google.com/spreadsheets/d/1LNPXDOz6CuflFjCwfl-GNWq7vpCTLpIPpiWog6bF7Vc/edit?usp=sharing
Fair start: The main goal is not through direct sales, but in some other objective criteria (for example, as an active user protocol) to distribute most tokens, and make sure everyone equal access to distribution. It’s like assuming that Uber is owned by its drivers and takeaway riders from day one.
Programmed to the center: the main objective is to gradually achieve community ownership, the asset management fell to minimize. It’s like assuming Uber signs a legally binding agreement to distribute majority shares to its drivers and takeaway riders in the next few years.
Increase marketing: The main objective is to stimulate a specific user behavior within a predetermined period of time. It’s like assuming Uber uses stock to give customers a rebate on part of their trip.
Each of these has its advantages and disadvantages. The agreement may involve multiple categories at the same time. For example, Uniswap’s hard-coded 2% inflation rate is a long-term programmatic allocation. The “best” approach will depend on the goals of the agreement.
The importance of liquid mining comes from multiple reasons:
- Wider distribution : The ICO in 2017 made many retail investors very angry. The private placement round resulted in a high percentage of tokens being sold to large investors. These investors later dumped their positions and led to a sharp drop in prices, causing heavy losses for retail investors. Liquid mining attempts to achieve a level playing field and provide institutional investors and retail investors with equal opportunities to own the original tokens of the protocol.
YAM and YFI are highlighted as “fair start”, source: https://synthesis.substack.com/p/fair-launches-will-disrupt-crypto
- Closer linkage : The advantage of the liquid mining plan is that token holders are more likely to become protocol users. After analyzing the user base of token holders, the 0x protocol reached the following conclusions at the end of 2019, and liquidity mining has effectively promoted this Venn diagram to be more closely integrated:
The data was collected on October 30, 2019, and does not reflect the current distribution of currency holdings, source: https://drive.google.com/file/d/1sQx8A1jUhO0IQhiqF7gGkwkn0Qwps8Da/view
More inclusive governance : Users with partial ownership of the agreement are motivated to help it succeed. By sharing the potential financial benefits as soon as possible, liquidity mining plan can enhance community involvement and agreement to help start or transition to decentralized organization DAO.
Speed up experiments : In the DeFi field, liquidity = availability. Reflexivity inherent mobility of the mining plan to promote on behalf of appreciation of the currency, thus promoting more capital inflows, forming a flywheel effect, reducing the team to new projects attractive market access threshold. This may also lead to a downward spiral in the opposite direction – as when bitcoin miners at BTC prices fell below a certain threshold to close its ore machine, the economic mechanism if an agreement can not create DeFi earnings, liquidity mining farming The farmer will also withdraw funds from the automatic market maker AMM or liquidity pool. This cycle accelerates the pace of innovation and ultimately benefits the industry.
Success
Dozens of experiments have been conducted in the past four months. Although it is easy to notice a failed protocol, many of the protocol design choices are successful and should be included in future iterations.
Reward for long-term liquidity
Most of the liquidity in the current liquidity mining plan comes from ” Pure Boli Capital “. They are not loyal to any agreement and just seek the most profitable opportunity at the time.
You may have friends like this. Register an account on every takeaway startup app to enjoy discounts or overlord meals. The problem here is that short-term liquidity is not as valuable as long-term liquidity, and liquidity mining plans should be adjusted to reflect this.
Ampleforth has a good performance in solving this problem. Its Geyser project uses a “time factor” mechanism to give different rewards according to the length of the deposit. The ” time factor ” is 1 on the first day, rises to 2 on the 30th day, and rises to 3 after the 60th day. Therefore, many people are willing to wait two more months before withdrawing.
The length of the retention period varies, but overall it is gratifying. According to the team information update on August 4 (43 days after the program was launched) , about 6,036 unique users tried Geyser, and 4,242 users were still active that day (retention rate is about 70%) .
According to unconfirmed internal information, on September 8 (78 days later) , Geyser (especially the AMPL-WETH Uniswap fund pool) had 7,318 unique users and 3,193 active users (retention rate of approximately 44%) . In view of the emergence of many other liquid mining plans, the decline in the number of users is expected, but the decline in liquidity is even more dramatic-as of September 8, the liquidity in the AMPL-WETH fund pool is about 9.5 million US dollars . Total deposits are approximately US$83 million (liquidity retention rate is approximately 11%) .
Fine tuning of parameters
Liquidity mining plans should not be “one-time-for-all”. Although the agreement team will try to predict possible deviations from these projects, they need to make adjustments at any time.
Balancer has performed well in fine-tuning parameters within a few weeks of the launch of the liquidity mining plan. Five new parameters have been added to reward specific types of liquidity, such as:
Proportionality factor : penalize unbalanced capital pools and provide traders with less available liquidity
Cost factor : Penalize high transaction fees, because this will reduce the attractiveness of the fund pool
wrapFactor : Penalize highly correlated asset pairs, because this will reduce the useful liquidity attracted by Balancer
Facts have proved that the rapid and continuous adjustment of Balancer has resonated with LP. Before the project started on June 1, the number of LPs was between 1-15. This number jumped to 71 on June 1, and it has continued to rise. The LP value for September is 861-1,517 .
Source: https://explore.duneanalytics.com/dashboard/balancer
Cross-protocol community interaction
The liquidity mining plan has not been smooth sailing. LPs will actively assess the opportunity cost of their participation in the project, and one of the effective ways to get them to participate is to be consistent with their current community.
YAM outstanding performance in this respect, they launched eight liquidity pool, aiming DeFi field the largest and most active community of tokens:
YAM v1 interactive interface
YAM’s rapid development is impressive, before the vulnerability of the agreement broke, 24-hour lock total assets of more than $ 500 million:
Source: https://explore.duneanalytics.com/dashboard/yams-
Continuous product innovation
The liquidity mining plan of the DeFi protocol, which is above the standard value, does not make it a better protocol. Before launching the liquid mining plan, Compound , Curve and Uniswap had excellent performances, and established functions and useful agreements before the launch of the liquid mining plan, making it easier for people to start participating in its liquid mining plan as soon as possible .
In addition, the agreement should not only focus on the bifurcation delete founder and investor distribution, but should focus on effective agreement to add a new utility, the new agreement allows forking out the competitive Unlike the original agreement.
Pickle Finance so far done a good job of product roadmap, which includes several innovative investment strategies to generate income and, ultimately, a stable currency arbitrage strategy, aims to restore a stable currency with a fixed exchange rate of fixed assets of the anchor.
Based is also actively developing its roadmap, which includes a decentralized exchange DEX and fair launch platform.
Token distribution time is shorter
Liquidity mining plans that have been distributed for too long have lost flexibility in responding to market dynamics and changes in protocol strategies. Although it is said that projects with a long distribution time are more suitable for token distribution, such token distribution can also be carried out on the open market according to the decisions and time preferences of buyers and sellers.
In addition, price discovery can be realized more effectively when sufficient circulation is introduced in the market. If a deal is extremely optimistic about the use of multi-year liquidity mining plan, but if the tokens in the early overpriced, and early tokens when the flow is low liquidity, hold out early who will face investment losses, there are hurt Community risk.
The release of Yearn’s YFI token is an extreme example, with 100% of its supply being distributed within 9 days . From a market perspective, architecture, hardly any seller selling pressure, because there is no holding cash at hand before, thus creating a virtuous cycle, an alliance holding cash at hand to enter the market early benefit the most from the rise in tokens. The token is currently held by 13,507 addresses and has one of the most enthusiastic and engaged communities in the industry.
The choice of a longer duration of the team plan a balanced approach is top-heavy distribution formula, since the earlier liquidity relatively late liquidity more valuable.
Bitcoin block reward and halved similar, your agreement may have attenuation function, reward function reward higher in the first few days / weeks, and gradually reduced.
SushiSwap have outstanding performance in this respect, that the first two weeks of tokens issued accelerated by 10 times, which makes them accumulated $ 1.5 billion in assets at the peak, about Uniswap liquidity was 73%.
Longer reward unlocking schedule
For liquidity mining plan to distribute tokens longer duration, there was one kind of economic vector of attack, in which case other protocols (such as Yearn yVaults, Harvest Finance) to generate revenue can participate in the program, and is not intended long-term support There are tokens. This reduces the rewards for participants who are willing to advance and retreat with the agreement’s long-term vision.
The team exit reward schedule may reduce the likelihood of such attacks, because mercenaries will think twice before participating in the plan. A longer timetable for unlocking rewards can reduce the likelihood of encountering such attacks, because Pure Boli Capital will think twice before entering the game.
Cash timetable also provides ample time for the dissemination of information throughout the market, can be determined by making token holders whether this is a viable long-term projects (for example, a clear token value accumulation, effective governance system, Active community) to help tokens realize price discovery.
DODO made a courageous decision in liquidity mining plan, the tokens locked until they provided initial liquidity on AMM week after, then a linear cash within the next six months. Even with these restrictions, DODO was still able to attract more than $90 million in liquidity from 3,105 addresses.
More performance parameters
Many protocols may start mining liquidity plan, which wants to encourage concrete results without clear objectives, or no metrics on the usefulness of these projects. Ideally, the team should be clear that “allocating X% of the token supply in Y week will cause the agreement to increase the liquidity of Z dollars.” Indicators will be the cost in dollars and units liquidity agreement around the token distribution duration Ideally, the more effective is the encrypted version of the original customer acquisition costs CAC Lock and total amount of LTV.
UMA ‘s liquidity mining plan has performed well in this respect, asking the following questions for a specific fund pool within a fixed period of time:
“What percentage of cultivators to sell immediately reward tokens?”
“What percentage of cultivators voting tokens for rewards?”
“How widespread distribution?”
The project is quite successful, attracting locked once worth about $ 20 million ETH, for the team contributed some very important data points, such as “the average daily liquidity costs” daily cost-of-liquidity, corresponding per million dollars of The value ranges from less than $1,000 to $4,500.
Fairer participation
Most of the current liquidity mining investors plan to make significant capital gains more generous, which is disappointing, hurt the enthusiasm and distribute tokens of community involvement.
Based trying to use a single address to pledge the amount of initial liquidity pool capped at $ 12,000 a way to solve this problem. Pickle also tried to use the ” second vote ” to prevent giant crocodiles from gaining unequal influence on governance decisions to solve this problem.
Although we don’t know whether the whale created multiple addresses to circumvent staking and voting restrictions, at least this is a step in the right direction.
Token supply capped
I believe that long-term projects should not limit the supply of tokens. These agreements is more like a company, not money, and no company will limit their ability to issue shares. In addition, the inability to create new liquidity mining plan, and therefore more vulnerable to the agreement vampire attack.
At the same time, the continued high inflation rate may harm the value of all token holders. In addition, high inflation may exacerbate governance-related attack vectors, which may have serious impacts on the wider DeFi ecosystem. For example, if a token X with an unlimited supply and adjustable inflation is accepted as collateral by Compound, then malicious participants can vote to mint countless tokens X to steal all the collateral in Compound.
One solution is to hard-code the tail part of the low inflation tokens into community management of the treasury, or hard-coded into the ultimate option inflation, while inflation will initially set to 0% and inflation at the same time set the upper limit.
Common problem
In addition to the above suggestions, there are several general problems that need to be resolved in the liquid mining plan:
Vulnerability: Although not intentional, liquidity mining plans may be loopholes to steal the user rewards. For example, Compound, recursive borrowing/loaning may cause “false” transaction amounts, causing real users to be squeezed out. According to some unconfirmed estimates, more than 30% of Compound’s reported supply (for example, there is currently $1 billion in supply, of which $700 million is non-recursive value) fall into this category. This kind of user behavior will not bring any value to Compound, because this liquidity is inaccessible to other users.
Technical risks : The cost of security audits is high, and teams that want a fair start often do not have the resources to complete security audits in advance. This led to the discovery of errors in its mainnet contract, which resulted in the loss of user funds. This also allows personnel with technical expertise or resources to gain a runaway advantage by checking the accuracy/safety of the contract. Fair Launch Capital trying to provide untied grants to cover the cost of audit and publish, in order to solve this problem.
“Rolling money” : Even if there are no unintentional loopholes, after all, most current liquid mining projects are started by anonymous founders, which undoubtedly creates the best conditions for crooks. These scammers may exploit the smart contract with little or no response (for example, calling the mint() function of Hotdog, etc., or only selling tokens in the Yuno protocol) . Users with strong technical backgrounds can understand the attack vectors using tools such as Diffchecker , but liquid mining is still a high-risk game for retail participants.
Information asymmetry : Although the goal of liquid mining is fair distribution, insiders may seize the opportunity in the first few minutes/hours of the liquid mining plan, which has an unfair advantage over retail participants. One way to solve this problem is to fully notify the launch of the liquidity mining plan.
Gas cost : Ethereum’s high gas fees often make small participants ” squeezed out of the competition “, and liquid mining plans are left to those who can afford to pay for gas. This will hurt token distribution and low-value projects, such as projects that focus on NFTs and games.
in conclusion
Although DeFi liquidity mining project carried out extensive testing, but we have yet to achieve the best possible distribution model, but please do not misunderstand – liquidity mining has grown to today’s situation.
In addition, although many liquid mining schemes have been successful at the time of writing, readers should note that we are not clear about the long-term impact. I look forward to reviewing it again within 6 to 12 months from now.
Thanks to Dan Elitze, Christopher Heymann, and Michael Anderson for their feedback on this article.
Source link: mp.weixin.qq.com
