The valuation system of crypto projects (1): higher liquidity

From the frictionless market hypothesis of traditional market economics to Hayek’s currency denationalization, the ecosystem of the currency circle may have changed.

The value anchoring presented by the traditional valuation model needs to be modified in the nominalized system of “currency circle”.

The consensus that “high returns are accompanied by high risks” needs a new definition. Does the risk come from stability gains or uncertain losses?

The value source of the currency circle is its high volatility, and the valuation of the currency circle should be based on the perspective of thinking about technology companies.

Similarly, the valuation of DEX is derived from the high liquidity it contains, which requires an understanding of the source of liquidity.

Leveraged Liquidity Mining

“Regarding liquidity as the first principle of financial products, everything is centered on how to improve liquidity. This is liquidity in a broad sense, which includes high capital efficiency, good trading experience, low friction, and liquidity. Low cost performance.”

Leveraged liquidity mining is an extension of leveraged lending in liquidity mining. The concept behind it is not complicated. Leveraged liquidity mining has two key participants:

1. LP: A lender who deposits Token into a loan pool to obtain liquidity.

2. Miner: Miners who borrow tokens from these loan pools to take advantage of leveraged liquidity mining.

Leveraged Liquidity Mining is also one of the few types of platforms that allows mortgage loans. It can safely achieve this goal by restricting loan funds to be used for liquidity mining of integrated exchanges within the scope of the agreement.

Although this use case may seem narrow at first glance, in practice, it accounts for the majority of DeFi activities today.

Loan applications may continue to expand in the future. It has no technical limitations, so once a new source of income emerges, the LYF agreement will seize these opportunities by providing users with on-chain leverage.

Unlike traditional loan platforms, leveraged liquidity mining allows low mortgage loans.

This higher capital efficiency not only means that Miner’s APY is higher, it also means that the lender’s APY has become higher. Because this low mortgage model creates a higher utilization rate, this is a major factor in most loan platform loan APY.

The benefits are clear at a glance, that is, higher APY.

This is why leveraged liquidity mining platforms such as Alpaca Finance have accumulated billions of dollars on TVL and have become commonly used DeFi platforms.

At present, the user base of the leveraged liquidity Mining platform is diverse and is not limited to those seeking risks.

There is another highlight of leveraged liquidity mining. How does it allow users to create advanced strategies through short selling and hedging?

In other words, through clever use of leverage and position customization, users can generate high returns when holding short or even market-neutral positions.

This means that leveraged liquidity mining can make you profitable in a bear market.

The valuation system of crypto projects (1): higher liquidity

Leveraged Liquidity Mining in TOP 10 DEX Under the same number of transactions, LP can get a higher rate of return

When the bear market comes, leveraged liquidity mining can still help LPs (liquidity providers) obtain relatively good liquidity returns.

Therefore, this solves the problem of the lack of sustainability of the currency circle under various market conditions.

Leveraged liquidity mining platform is a way to solve this problem, and may also become one of the few DeFi safe havens that can still be profitable during the bear market.

Mortgage lending increases relevance

Mortgage lending is a way to quickly increase the liquidity of the currency circle, and it is also one of the culprits that caused the currency circle to soar and plummet.

Current mortgage lending is based on over-collateralization. For example, when you want to borrow 3000 USDC , you will need 10 ETH , while in the lending platform, you need to mortgage 12.5 ETH (generally, the lending platform uses 125% as its mortgage basis).

The valuation system of crypto projects (1): higher liquidity

Over-collateralized lending in dYdX

Mortgage lending is mostly based on one or several currencies as the collateral, so that when any one of the currencies falls, other currencies may also fall due to the mortgage lending relationship among them.

Therefore, the high correlation based on mortgage lending has exacerbated the phenomenon of the same rise and fall of cryptocurrencies.

At the same time, in DeFi, the operation of the protocol needs to depend on the earning income of the miners, such as the liquidation of Aave Protocol and Compound.

In the DeFi mortgage loan agreement, when the value of the collateral drops, if the mortgage assets are not made up or sold, the liquidation process will be triggered.

Liquidators can obtain mortgage assets such as ETH at a discount of 3%-5% below the market price, and the discount value of 3%-5% is the profit that can be withdrawn by the miners who execute the agreement.

Based on this mechanism, unreasonable use of liquidity vulnerabilities such as sandwich attacks and preemptive transactions will appear. And serious liquidity arbitrage has even destroyed the coexisting cryptographic consensus.

In general, most of the current encryption projects based on DEX are initiated by the introduction of LP for original liquidity.

The main income of liquidity providers comes from spreads, payment of capital costs, transaction costs and other income.

AMM uses the above information to adjust pricing, share liquidity, and liquidity aggregation along with index prices, as well as adjust parameters such as spreads, capital costs, and transaction costs, so as to reduce the risks of liquidity providers and increase returns.

In addition, most of the innovation comes from special parameter design, which allows for lower risk exposure while satisfying the need to obtain higher returns.

But all in all, its higher liquidity is the first value of this type of encryption project.


Posted by:CoinYuppie,Reprinted with attribution to:
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