Understanding Liquidity as a Service (LaaS) in DeFi in One Article

Why is liquidity important?

Liquidity is important because all cryptocurrencies rely on liquidity to operate, just as the world operates on fossil fuel energy. Protocols and platforms with high liquidity depth can support more efficient transactions. Over time, this has formed a “monopoly” moat with other agreements and platforms, similar to the money printing machines of companies such as Google and Microsoft.

Facts have proved that liquidity mining is the preferred method for DeFi startups to guide liquidity. This was initially used to attract liquidity for the agreement, with great success. However, this is a costly approach, and it has been found that farmers, as the main liquidity providers, are financially motivated to frequently dig and sell to lock in profits. This increases selling pressure, weakens the purchasing power of the treasury, and reduces the value of tokens for long-term agreement holders.

Capital efficiency is a key indicator of the Treasury, as they spend millions of dollars in incentives every week to provide liquidity for their projects. The liquidity-as-a-service (LaaS) industry is developing rapidly, attracting $5 billion in TVL in less than a few months by providing greater depth of liquidity and higher capital efficiency. This new field is formed by protocols such as Curve Bribes, Olympus Pro, Tokemak and UMA.

Curve Bribes-the direction of liquidity

The agreement can participate in Curve Bribes to increase the depth of liquidity. When the Curve Bribe agreement was conducted, they used bribes to control greater voting power, which was used to direct liquidity to the required Curve pool. Abracadabra has achieved great success with bribery, creating more than $700 million in total liquidity for the protocol’s decentralized token MIM. CRV on MIM pool Curve Bribes to obtain higher returns by increasing liquidity reward (SPELL + CRV incentives) as a result of bribery. Currently, approximately US$14 million per month (130 million SPELLs at a price of 0.028u) is allocated to Curve Bribes and Curve’s new voting system. At approximately US$14 million per month, Abracadabra’s liquidity depth has increased significantly.

Olympus Pro-bond market

Olympus Pro allows the protocol to create a market in which liquidity providers can trade their LP tokens in exchange for tokens held in the protocol treasury, such as governance tokens or other tokens in the treasury. This market allows the agreement to repurchase its liquidity and ultimately own all the liquidity, thereby being able to provide liquidity without having to pay a large amount of funds to incentivize the liquidity pool. The market uses a bond mechanism to create a more efficient market through automatic price discovery.

This not only increases the diversification of funds by owning LP tokens, but also reduces the cost of liquidity, which is usually one of the highest recurring capital expenditures. For example, Alchemix sends out approximately 16,000 ALCX (approximately US$30 million/month, calculated at the ALCX price of US$475) every week to incentivize the liquidity pool. One potential disadvantage of Olympus Pro is that it requires high upfront costs to start repurchasing liquidity. Funds are usually raised by selling governance tokens at discounted prices to replace the proceeds of liquidity providers.

Since the first launch of Olympus Pro in October, OP Bonds have received US$7.5 million in liquidity for the first seven partners-Abracadabra, Alchemix, Float Protocol, Frax, Pendle, ShapeShift and StakeDAO. Olympus DAO TVL has grown from USD 150 million in September 2021 to nearly USD 4 billion.

Tokemak-Decentralized Market Maker

Tokemark provides a decentralized market maker for any other agreement, thereby creating a market with sustainable liquidity and higher capital efficiency. The Tokemak team was originally spun off from Fractal, a professional DeFi market maker. Tokemark recently started the liquidity deployment process and completed its first Collateralization of Reactors Event (CoRE). CoRE 2 is scheduled to start in early November 2021. As of the end of October 2021, in less than two months, Tokemak’s TVL has exceeded $1 billion, and will launch its own version of its liquidity direction through TOKE voting rights in December 2021.

Liquidity provider rewards are paid in TOKE, and transaction fees are accumulated in the agreement. Over time, these fees will reach a critical mass, or “singularity,” which will enable the agreement to be self-sustaining without the need for liquidity providers. Then, TOKE holders can manage these capitals as they see fit, earn transaction fees without having to pay any more TOKE rewards, thereby closing the liquidity cycle.

Success tokens-another option for diversified funds

The Success token allows the DAO to provide investors with a call option to govern the token. The investor pays the full price of the token. This may be a potentially profitable way to raise funds from venture capitalists or even other treasury investors, so that the two Treasury bonds can be diversified by exchanging these call options. Who doesn’t want call options for their favorite DeFi project?

Range tokens are a capital-efficient source of liquidity

UMA’s Range token allows DAO to borrow funds without risk of liquidation, while diversifying funds. The function of the Range token is similar to that of a convertible bond. The advantage of using Range tokens to raise funds is that the governance tokens will be sold in the future, presumably when the value of the governance tokens is higher than the initial funds raised, thereby improving the capital efficiency of the governance tokens. Governance tokens can be used to open risk-free collateralized debt positions with Range tokens and use the raised funds to fund treasury purchases/spending, such as using Olympus Pro Bonds or Tokemak to purchase liquidity.

UMA used the Range token pilot program to raise $2.6 million from investors. The term of the Range token is 3 months, the APY rate of return is 25%, and the price of UMA ranges from $4 to $12. If the UMA is greater than $12 at maturity, the investor’s actual APY is higher than 25% because the investor has long-term holdings of $12 call options. If UMA is less than US$4, the investor’s actual annual rate of return is less than 25%, but the investor holds a short position in US$4 put options. UMA and investors are allocated at a ratio of 1:1 to improve speed and simplicity, but can be flexibly allocated in the best way that suits the needs of the national treasury.

KPI options can incentivize the treasury to obtain liquidity more effectively

KPI options are financial derivative contracts formulated by UMA, which allow agreements to incentivize progress towards specific KPI (key performance indicator) goals, and pay more and more rewards based on the completion of KPI indicators. KPI options provide an alternative to liquidity incentives, and try to align the incentives of liquidity providers with agreement incentives to prevent excessive selling pressure and increase the depth of liquidity. The greater the depth of liquidity promised, the greater the payment. More rewards.

Although the current method incentivizes greater depth of liquidity, it is not capital efficiency, because the more successful KPI options, the greater the depth of liquidity achieved, and the greater the cost of capital expenditures. Instead, KPI options should incentivize the adoption of LaaS services, such as Curve Bribes, Olympus Pro, and Tokemak. This will add another kind of economic incentives to encourage more sustainable liquidity into the national treasury strategy.

in conclusion

LaaS is a fast-growing encryption infrastructure industry with a high demand because every protocol requires liquidity. At present, not all agreements are using the most capital-efficient way to achieve sustainable liquidity introduction, and they will rush to run the inevitable LaaS services in the future. With the continuous development of DeFi, LaaS will continue to flourish and will create the DeFi Lego blocks needed to support the future DeFi industry.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/understanding-liquidity-as-a-service-laas-in-defi-in-one-article/
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