Behind Liquidity Mining: The Surge and Embarrassment of DeFi

Chain catcher (ID: iqklbs)

, Author: Wang Dashu, reproduced by Odaily with authorization.

2020 is still a year of lack of hot spots. DeFi, as an industry that continues to be optimistic, has successfully achieved a total lock-up of nearly 2.9 billion US dollars. Various model innovations have allowed the DeFi concept to sit firmly at the top of the topic list in the first half of the year. However, Behind every hot topic there must be controversy.

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Tide from Compound

"Some time ago, I issued my own currency on Uniswap, built a fund pool by myself, and then completed the exchange on imtoken. Although the whole process was just an experience, it surprised me. On the one hand, listing currency can be so simple , neither audit nor KYC is required, on the other hand, the design of the self-built fund pool and algorithmic liquidity mechanism is amazing, theoretically, as long as the fund pool is large enough, unlimited liquidity can be generated.” DeFi player Lin Yi analyzed.

He told the chain catcher that he likes new things. As early as the first half of 2019, he tried to do transactions on MakerDao, buying ETH with fiat currency from the exchange-withdrawing to the wallet-transferring to the Maker contract address-generating Dai-recharging Dai to The platform that supported the transaction was replaced by ETH, and finally sold ETH into fiat currency in exchange for liquidity. At that time, it took about 4-5 transfers on the chain to complete a loan. The complicated operation made him daunted.

Now, after a year, Lin, who experienced Uniswap, was surprised by the innovation of the DeFi ecosystem, and at the same time worried about the DeFi boom caused by liquidity mining. “The liquidity mining model has already begun to take shape as early as 2018 when Dapp was hot, but now it has only been repackaged and introduced into the DeFi ecosystem, and its sustainability is worrying.”

"Liquidity mining" generally refers to the process of depositing or lending designated token assets as required through DeFi products with mining mechanisms to provide liquidity for the product's fund pool and obtain income. This benefit could be the project's native token, or the governance rights it represents. In essence, it stimulates the generation of asset liquidity through the design of economic models.

Compound is an algorithm-based mortgage lending protocol that provides users with current floating-rate deposits and loan services. Users can mortgage their assets to obtain annualized returns, and they can also pay corresponding interest to lend assets. At the same time as the loan, a certain amount of the governance token COMP distributed by the system can be obtained. COMP holders can propose changes to the Compound protocol or vote on the proposal. To put it simply, Compound can be understood as borrowing and mining.

Since Compound launched the liquidity mining of its governance token COMP on June 15, Compound’s share in the lending market has directly increased from 10% to 80%. In addition, Debank data shows that the current lock-up amount of Compound has reached 690 million US dollars.

However, Zhuang Ge, an insider in the industry, told the chain catcher that from the perspective of "mining, selling and withdrawing", the loan-to-mining model is not sustainable, but to his surprise, this model is actually in Comp The selling pressure lasted for nearly a month.

In fact, Zhuang Ge's judgment is similar to Lin Yi's concern. Lin Yi not only experienced the prevalence of similar models during the Dapp boom, but also saw various XX or mining projects in the blockchain industry in the past two years. "Transaction is mining." mine", "creation is mining" and so on. Among them, the fact that FCoin, which once ranked among the top in the exchange industry by trading or mining, finally fell into the quagmire of being unable to cash in, shows that there are loopholes in the mining token model.

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Advantages and disadvantages of the model

"At that time, Lendf.Me was hacked, and I had a deposit of several thousand dollars on it. When I heard the news, the adrenaline really soared. Although it was within the tolerance range, it still hurt." Player Zhao Zheng told the chain catcher. The yield of Compound mining once exceeded 200%. However, with the addition of uncertain factors such as declining yields, fluctuations in Ethereum gas fees, and hacker attacks, he is now in a wait-and-see state.

In fact, every time a DeFi project is stolen, it will be speculated that there is a self-stealing behavior. However, behind this actually reflects the lack of transparency in the development of the DeFi project and the design of the liquidity mechanism, so it is inevitable to be questioned.

As Yang Zhou, the founder and CEO of PayPal Finance, said publicly, since the Admin Key of many DeFi projects is in the hands of the project party itself, the project party essentially has the right to decide how assets are transferred. In this way, DeFi The credit of the product is still based on the trust in the project party and other institutions, so this decentralized financial operation method may not be able to bring complete trust and transparency to users.

However, it is undeniable that the liquidity mining model is indeed the best way for DeFi to obtain liquidity, and players may not worry about future problems, after all, the goal is the current high returns.

And this is one of the reasons why most DeFi protocols have never stopped exploring liquidity in the past two years. Therefore, the liquidity mining solution launched by Compound this time can be regarded as the first step taken by DeFi protocols at this level. step.

Following Compound, the decentralized exchange Balancer also launched liquidity mining. According to DeBank data, the total locked position of balancer has grown from 29 million US dollars on June 17 to about 190 million US dollars on July 17, an increase of nearly 7 times in a month, and the transaction volume in the most recent week ranked fourth, 24H users The number is second only to Uniswap.

However, it is not difficult to understand following the move, after all, the DeFi ecology has a rigid demand for capital liquidity. The "Liquidity Mining" model, on the one hand, can provide effective incentives for the cold start of the project, on the other hand, it can promote the connection and exchange between different DeFi products, thereby accelerating the prosperity of the DeFi ecosystem.

But everything has two sides, and the mining model also has systemic risks.

The first is the risk of being liquidated. For example, in June this year, miners who participated in Compound mining were accidentally liquidated due to improper setting of the pledge rate, and lost tens of thousands of dollars. The second is the security risk of smart contracts. For example, in April this year, attackers used Lendf.Me and The ERC777 compatibility vulnerability launched an attack that resulted in the theft of player funds.

Finally, there is a systemic risk. Due to the crazy leverage game of arbitrageurs, it is likely to cause a chain of collapse of various protocols in the DeFi ecosystem under extreme circumstances. The fact that Compound modified the mining mechanism of COMP a few days ago caused a sharp increase in the demand for DAI, which led to more players pouring into MakerDAO, and the fact that the upper limit of CDP was pushed up is the best example.

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There are still bottlenecks to be overcome

In fact, in addition to Balancer, Curve, Bancorye, etc. have also launched liquidity mining models. According to Debank data, the current total lock-up volume in the DeFi market is nearly 2.8 billion US dollars, of which Compound accounts for the largest proportion. However, Uniswap, the number one exchange among DEXs, has not launched a liquidity mining model.

Uniswap is a decentralized transaction protocol based on an exchange pool. Users can deposit any ERC20 Token and a certain amount of ETH into Uniswap to create an exchange pool between the Token and ETH. Any user can use this exchange pool to exchange The transaction between this token and ETH is the aforementioned pattern that surprised Lin Yi.

However, Uniswap has never had a native token, which is easy to be sucked away by projects that support liquidity mining when the total amount of assets on the Ethereum chain is constant and the market is still a stock game.

However, Debank Tang Hongbo told the chain catcher that Uniswap started very early, attracting traffic with its exquisite user interface design and ultra-low gas fees in the early days, and it is still the best choice in the hearts of users. The popularity of the liquidity mining model has seized part of the transaction volume, but if Uniswap also launches the liquidity mining model, it may soon regain the share seized by the balancer.

In addition, he also revealed that theoretically based on the AMM model DEX can be divided into four generations: Bancor, uniswap, blancer, and curve. Among them, Uniswap is invested by V God, which is very popular in the Ethereum ecosystem. Moreover, the real growth of DEX is not based on the tokens of liquidity mining, but since the 312 market waterfall, there has been a large-scale liquidation of lending services, and the demand has only begun, because for liquidators, the best way to liquidate is to do it directly on the chain Liquidation, in view of this demand, the liquidity of DEX began to increase, and the corresponding innovation model gradually attracted attention.

However, while DEX based on the AMM model strengthens liquidity construction, it also provides harvesting space for many fund projects. Deep Chain Finance once published an article pointing out that the existing deflationary token Sta on Uniswap soared by 10,000 in just 6 days times, and some projects even returned to zero in just 1 hour.