The double-edged sword of liquid mining
The cryptocurrency market and trends change very rapidly. Many projects have come and gone. Among them, we can find new and meaningful projects to try.
Let us think about Compound that brought “DeFi Summer” last year. Compound rewards protocol contributors with “liquidity mining”, which enables Compound to quickly start the protocol at an early stage.
Since then, projects based on liquidity mining have begun to appear, ushering in the era of open financial platforms led by Uniswap , Aave and Yearn Finance. People began to flock to projects with high annual interest rates (APY), becoming “Yield Farmers” that make profits from DeFi.
However, this liquid mining model may be a double-edged sword. Although liquid mining can help guide the protocol in the early stages of community building and user acquisition, its shortcomings are obvious. With the continuous release of liquidity supply compensation, there is selling pressure, making the model unsustainable in the long run.
In order to compensate for the liquidity of mining, DeFi services attract users with high APY, and the high inflation of circulating tokens eventually leads to a decline in token prices.
Call options and put options
There have been some attempts to alleviate these shortcomings of liquid mining. An interesting idea is to use “options” to set the strike price and expiration date for the token to reduce the immediate selling pressure from liquid mining compensation.
Synthetic assets and derivatives agreement UMA launched Range Token. It sets a certain token price range by combining put options and call options to control the number and price of tokens that can be received when the option is executed.
At the same time, Fantom’s technical adviser Andre Cronje also proposed the use of call options for compensation. The compensation is paid through a call option, which can be purchased at a discount of X% of the current token price after a certain number of months. Adding these additional conditions can reduce the selling pressure of the tokens and prevent the possibility of a drop of X% during this period.
Liquidity owned by the agreement, POL
OlympusDAO is a decentralized reserve currency protocol operated by algorithms and governance. The value of OHM is determined by several assets stored in the Olympus DAO library. Olympus’ governance is operated through game theory, with a unique “pledge” and “bond” structure.
Users can create LP tokens, such as OHM-DAI and OHM-FRAX, to issue “bonds” and purchase OHM at a discounted price within a certain period of time (currently, maturity in 5 days, discount rate of about 7%). Therefore, when you buy OHM at a discounted price, the LP tokens made by the user will be exchanged with the agreement.
Unlike existing liquidity providers who can stop providing liquidity at any time and receive liquidity through the agreement, Olympus’s pledge and bond structure can maintain liquidity by binding LP tokens to the agreement in the form of bonds. Create “Agreement Owned Liquidity (POL)”.
In addition, the protocol itself rather than the user owns LP tokens, thereby generating transaction fees from the liquidity pool, while preventing immediate selling pressure from liquidity providers.
OlympusDAO also launched “Olympus Pro” so that other protocols can also use this mechanism.
Abracadabra Money is a protocol that allows users to use liquid assets held by yvUSDT and x SUSHI as collateral to borrow a stable currency called MIM (Magic Internet Money).
Mortgage stable currency, such as MakerDAO, with Ethernet Square , USDC and USDT and other assets as collateral issue stable currency. However, if people use the yvUSDT obtained through xSUSHI pledge USDT in Year or Sushi as collateral, they can get deposits or pledge rewards, as well as loans. In other words, the liquidity and efficiency of assets are maximized.
Tokemak is a decentralized market maker and liquidity provider operated by DAO. Users deposit assets in Token Reactor and obtain TOKE tokens for liquidity supply. Liquidity Director (LD) becomes Tokemak DAO by staking its TOKE. LD has the right to analyze the agreement to provide liquidity and send deposit assets to the agreement.
Alchemix is a mortgage stable loan platform that uses Yearn Vault to automatically repay loans, and the collateral stored in the Vault generates deposit compensation. One alUSD corresponds to one DAI as a stable currency, the interest is generated by Yearn Vault, and the’Transmuter’ algorithm function maintains the price of alUSD.
So, is it DeFi 2.0?
So far, the existing DeFi projects are not much different from traditional financial services such as swaps, mining, mortgages, and leverage. Use liquidity to mine and give higher APY to attract users. However, it failed to become a long-term operational model.
OlympusDAO puts forward the new concept of “agreement has liquidity”. In the existing DeFi, liquidity is provided by the user and is subject to the user’s control, while in OlympusDAO, the protocol itself can assume liquidity and control.
Liquidity is issued as a bond, so liquidity is bound to the agreement in the long term. This reduces efficiency and does not require arbitrary rewards of tokens as compensation for liquidity supply.
In addition to OlympusDAO, there are also many projects that hope to improve liquidity and capital efficiency, such as Alchemix and Tokemak. This is definitely a new and interesting attempt. The goal of all these agreements is to maximize liquidity and capital efficiency.
However, the symbolic meaning and significance of early DeFi projects such as Uniswap’s AMM, Compound’s liquidity mining and Yearn Finance’s aggregator cannot be ignored.
Currently, OlympusDao is promoting its “DeFi 2.0” on Twitter. So far, it seems that “DeFi 2.0” is still a popular word in marketing, but we should pay attention to whether it will really become a game changer for DeFi 2.0, or just a top compatible version of DeFi 1.1. Time will tell us.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/can-the-liquidity-of-the-agreement-become-defi-2-0/
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