A year ago, Decentralized Finance (DeFi) began to gain widespread attention from the cryptocurrency community, but without the influence of the concepts of Liquidity Mining and Yield Farming, the DeFi ecosystem may not have grown as quickly as it did in the span of a year, and likely would not have had the “DeFi Summer” that followed.
Looking back on the year’s achievements, the DeFi ecosystem has grown faster than one can imagine, and a few random numbers can be found in the hundreds, such as a 170x increase in lending funds, a 140x increase in the number of users trading, a 140x increase in the total amount of assets locked in DeFi’s smart contracts, and more.
Although the term “liquidity mining” was neither invented by Compound nor was it the first mechanism they adopted, Compound was the most important driver of this. Almost all of the information about liquidity mining available on the web also comes after Compound launched “lend-and-mine,” which is exactly one year ago now.
Since then, liquidity mining has become the most worthwhile mechanism in the early days of the DeFi protocol, and has even become a standard “template” on which many projects are based and fine-tuned with their own features.
The users involved in “liquidity mining” are divided into two main categories.
One category is the “dig and sell mention” big whales or machine gun pools, which directly sell the token rewards obtained for cash.
The other category is users who expect to participate in primary market token distribution through this type of approach and can grow together with the project through this mechanism.
The opposing view is that the ‘nesting’ risks associated with this mechanism (e.g. protocols mining in combination with each other) may increase the systemic risk of the entire DeFi ecosystem, while the distribution method may also prematurely overdraw the growth of the protocols if not precisely designed. Just as Uniswap stopped after a few attempts at liquidity mining campaigns and has not run any new campaigns until after the V3 release, perhaps it is also designing a more sensible solution.
Regardless, the mechanism has been a good way to motivate the cryptocurrency community and users to participate in the DeFi protocol, and has become an essential part of any new project.
On the first anniversary of liquidity mining, we would like to take a look at what the DeFi ecosystem has achieved and what its impact has been in the past year – it is important to note that the rise of DeFi was not entirely due to “liquidity mining” alone, but it is certainly one of the most important factors.
Who coined the term liquidity mining?
The earliest known source of the term liquidity mining is the open-source automated trading tool Hummingbot, which people started using in June 2020, and the Hummingbot team more than half a year before that.
Hummingbot is a tool that is biased towards professional users, so the average user may not be aware of it.
The team first announced the “launch of liquidity mining” in a blog post on November 1, 2019, and later started adding related features in version 0.20.0 in December, and then opened a Beta test in version 0.23.0 in February 2020, with initial support for centralized and decentralized exchanges, such as Cryptocurrency and 0x Mesh, respectively. The initial supported centralized and decentralized exchanges are Coinan and 0x Mesh, etc.
In Hummingbot’s earliest definition, “liquidity mining” referred specifically to providing liquidity to exchanges, and later the DeFi industry further generalized the concept to lending or other financial applications, as these services also require a party to provide liquidity. Another new term evolved: “Yield Farming”.
Hummingbot’s definition of “liquidity mining” is very precise and complete, and you can enjoy their explanation here.
We call this thing ‘liquidity mining’ because it’s very similar in concept to PoW mining. In contrast to using miners and electricity, liquidity mining uses computing resources and token inventory to run Hummingbot’s market-making client. By competing with other participants for financial incentives, their combined efforts can achieve a common goal of providing liquidity for specific tokens and exchanges. In return, they are compensated commensurate with their work, based on an algorithmically defined model.
The Hummingbot team has also released a simultaneous whitepaper titled ‘Liquidity Mining’ (https://hummingbot.io/liquidity-mining-whitepaper) with more specific details, which has a completion date of October 30, 2019.
Which was the first DeFi project to adopt liquidity?
The earliest DeFi protocol to adopt a liquidity mining mechanism was probably Synthetix, a synthetic asset protocol, who first launched their liquidity incentive campaign in February 2020, almost 4 months before the DeFi boom that later kicked off in June 2020.
Synthetix did not use the term “liquidity mining” at the time, but rather called it the “LP Reward System,” where LP stands for liquidity provider, and later they used terms like “liquidity incentive trial” to describe the liquidity mining campaign.
Mechanically, Synthetix launched an incentive campaign similar to the later liquidity mining, with the first campaign rewarding those who provided synthetic asset liquidity on Uniswap, with the first supported pair being sETH/ETH.
Of course, the full chain to get the reward is quite long: users first need to pledge SNX in exchange for sUSD, then trade it for sETH, then match it with the same amount of ETH to provide liquidity on Uniswap and get “LP tokens”, and finally pledge the LP tokens in Synthetix’s smart contract to subsequently receive SNX as a reward.
Who ignited the liquidity mining boom?
While early liquidity mining was more of a transaction-related scenario, the liquidity mining boom was actually driven by Compound, a decentralized lending protocol.
Compound officially launched the distribution of its governance token, COMP, during June 2020, making other DeFi protocols aware for the first time on a large scale that they could grow the protocol’s liquidity through the protocol’s own governance token.
The mechanism is relatively simple, as users can routinely use Compound’s lending protocol to be allocated a certain number of governance tokens based on the amount of money they are lending, but this mechanism has since been tweaked several times.
Thanks to the fact that Compound itself is one of the larger and more influential projects in the DeFi protocol, and that it has never made its native token plans public before, there was a lot of discussion and research when the community learned that Compound was launching a “governance token with no real value”.
At the time, Compound and the community did not refer to their mechanism as ‘liquidity mining’, but it did prompt other projects to use the ‘liquidity mining’ mechanism later on. If you search for the term “liquidity mining” on Chain News, you will find that the term appeared right around the time Compound made their token distribution mechanism public, which should not be a coincidence.
All things considered, this was a landmark event for Compound and led to the DeFi boom in the following months, which was also called “DeFi Summer” by the overseas community.
Is liquidity mining the same as FCoin’s “transaction mining”?
I remember shortly after the launch of the liquidity mining concept, there were many voices in the Chinese domestic community that believed it was the same as FCoin’s “transaction mining” launched in 2018, and some even believed that FCoin, which launched “transaction mining”, was the originator of “liquidity mining”.
In fact, the core difference between these two concepts is still very obvious. The blockchain-based “liquidity mining” with transparent transaction data ensures that the entire process is auditable and traceable, while FCoin fails to sustain itself largely due to its chaotic centralized management and lack of transparency in the status of assets under custody.
More importantly, although the three projects mentioned above (Hummingbot, Synthetix and Compound) all use what is ultimately called “liquidity mining”, they are essentially different mechanisms, with Hummingbot being similar to FCoin’s transaction mining.
Data speaks for itself: DeFi this year
Total Volume Locked (TVL): 140x
Total Volume Locked (TVL) is a core metric for assessing liquidity and capacity in the DeFi ecosystem, that is, how much real money assets people are putting into DeFi smart contracts to add scale to the overall system.
Referring to DeBank data, the total lock-up volume of all DeFi at that time was $940 million as of June 1, 2020, while it peaked on May 11, 2021, when the total lock-up volume was $131.4 billion, an increase of nearly 140 times in one year.
Total borrowing: 170x
The total borrowing volume of one type of agreement in DeFi, which specializes in over-collateralized lending, is indicative of the size of collateralization and lending for this type of agreement.
On June 1, 2020, the total amount borrowed by all DeFi was $150 million, compared to a peak of $26.7 billion on May 9, 2021, an increase of more than 170 times in one year.
Transaction Users: 140x
Trading agreements are also the most important facility in the DeFi ecosystem, so the number of users using trading agreements (in terms of separate addresses) is indicative of the size of the user base across the DeFi ecosystem.
On June 1, 2020, the number of users of all DeFi’s transaction agreements on that day was more than 6,200, while the peak was May 11, 2021, with 850,000 users transacting on that day, an increase of almost 140 times in one year.
Transaction volume: 1,000 times
For trading protocols, transaction volume is also a very intuitive standard. Especially since the launch of Coin Smartchain (BSC) this year, the trading volume of the trading protocols in its network has seen another very exaggerated increase.
On May 31, 2020, the volume of all agreements traded on that day was $22.3 million, while the peak was May 29, 2021, when the volume was $23 billion, an increase of more than 1,000 times in one year.
Gas Price: up to 18x
In fact, before DeFi Summer, Gas Price, which marks the price of the ethereum network, had already grown significantly, from single-digit GWei levels to tens of GWei levels. But after liquidity mining kicked in, Gas Price continued to grow rapidly until recently, when it trended downward.
According to Blockchair, the median Gas Price was 30 GWei on June 1, 2020, and peaked at 544 GWei on September 17, 2020, an 18x increase in 3 months.
Interestingly, September 17, 2020 was the day Uniswap announced the issuance of governance tokens and an airdrop, so a large number of on-chain transactions to receive UNI airdrop tokens were generated that day.
Block Capacity: Three Boosts, Cumulative 50% Increase
Unlike Bitcoin, the block capacity of Ether can be adjusted according to miners’ votes, so as physical network, computing and storage resources are upgraded, miners can choose to continuously increase the capacity and throughput of the Ether network among themselves.
Before June 2020, the capacity of each block of Ether (Gas Limit) was 10 million GWei, then it was raised 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 increased again to 15 million GWei, a 50% increase compared to the same period last year.
Stablecoin Issuance: 10x
Demand for stablecoins has also grown significantly, from $7.3 billion in stablecoin issuance on June 1 of last year to $70.5 billion today, a nearly 10-fold increase in a year’s time.
BTC cross-chain coin issuance: 48x
With the growth of DeFi, the demand for BTC in the ethereum network is growing fast, after all it is also a native crypto asset with a very large user base and market cap.
The number of BTC anchor coins issued has grown from 5,200 BTC on June 1 last year to 250,000 BTC today, a 48-fold increase in one year.
Prophecy Machine Calls: 500x
Prophecy machines did not gain massive adoption before the rapid growth of DeFi, but since last year’s DeFi Summer, the demand for prophecy machines has also changed dramatically.
On June 1, 2020, the number of prophecy machine calls that day was 72, while it peaked on December 18, 2020, with nearly 40,000 prophecy machine calls that day, an increase of more than 500 times in six months.
How will DeFi continue to grow?
One of the most obvious indicators of the recent downturn we’ve seen in the cryptocurrency market is the decline in Gas Price, as well as various other declines in other data. Does this mean that the DeFi ecosystem in ethereum has hit a ceiling?
In fact, from the data, the DeFi ecosystem is still a small baby, although the TVL of Ether has now fallen to $56 billion, but more assets have not yet entered the DeFi ecosystem.
To do a simple calculation, if we take: “market value of Ether + market value of stable coins and BTC on the Ether chain + market value of the 5 projects with the largest market value on the Ether chain (UNI, LINK, MATIC, AMP, AAVE)”, this scale is about $400 billion. So it seems that $56 billion is only 14% of $400 billion, and that doesn’t even include the thousands of long-tail tokens on the ethereum chain.
In addition to the size of the assets, the current Ether is limited by the throughput, and many transaction-based applications have encountered bottlenecks in growth because they are “too expensive” and “too slow”. Although the block capacity has increased by 50% within this year, it is still a long way from being cheap and useful.
Fortunately, there are finally various new generation Layer2 (Layer 2 network) protocols that have come online or will come online soon, which will be the core foundation for DeFi’s next growth. It will be interesting to see how the new infrastructure will lead to some more interesting mechanisms than “liquidity mining”.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/one-year-since-the-explosion-of-liquidity-mining-see-how-defi-is-growing/
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