DeFi Liquidity Mining Has Been Chartered by Big Investors?
Editor's Note: This article comes fromCrypto Valley Live (ID: cryptovalley)Editor's Note: This article comes from
Crypto Valley Live (ID: cryptovalley)"Crypto Valley Live (ID: cryptovalley)", Author: Stefan Grasmann, translation: Li Hanbo, reproduced by Odaily with authorization."All along, people have promised that DeFi should", to help developing countries build an open financial system. then, have
small pocket
Shouldn’t token holders also be able to get a share of the profits from these platforms and their incentives? Or even better. Should these systems be designed for these users in the first place?
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Is Defi an ecosystem for big players?
Decentralized finance (DeFi) has been dominating the blockchain headlines lately. A lot of capital is flowing into these systems, the capital scale is in the billions of dollars.
Now is the time to ask important questions like:
Who benefits the most from this development?
But let's take a step-by-step look at what has happened since January 2020.
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secondary title"Tradition"First, projects like 0x"utility"Tradition
DeFi projects launched their staking on-ramps to push token holders to take more action and generate more for their native tokens
utility
. Promise: If you stake ZRX tokens (the native token behind the 0x project) and regularly participate in the project’s governance votes, you have a chance to earn some rewards. Well-known DeFi projects like MakerDAO have done it before, and others like Kyber have followed suit. It works roughly like this:
Stake your tokens for a certain time frame (often called an epoch)."Participate in governance - either by voting regularly yourself or by delegating your voting power to a delegation pool."Claim your reward."All of this happens on-chain. Generally, you send your tokens"give to
release
to regain control of your tokens - usually with some time delay.
secondary title"locking"Later in June, projects like Compound, Aave, Synthetix, Curve, or Balancer began using advanced mechanisms like yield farming to attract large amounts of crypto assets to their platforms. By depositing your assets into and
locking
To the liquidity pool of their platform (rather than pure Staking or hype). These platforms actively use your tokens in their systems - and generate higher returns. Not only can you get back substantial interest. Additionally, you now also get native platform tokens that are set up to allow the community to govern the future of these platforms. This goes so far that you can earn tokens in 4 different dimensions, like in this sBTC example, when you offer e.g. Wrapped Bitcoin to Synthetix's sBTC pool on Curve. Offers like these currently push the valuation of these projects to $8 billion. The enormous value of tokens locked in these systems doubles every few weeks! DEFI Pulse has a good overview of the most popular projects - most of them are tightly integrated with each other.
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Governance Token Offerings - Similar to ICOs, But Different
Issuing governance tokens upended the 2017 ICO (Initial Coin Offering) wave, if you will. While ICOs offered project token sales early in their development (mostly based on rough ideas and project roadmaps written in white papers), now these projects once their platforms are up and running and have proven some product-market fit, Tokens will be issued. We can name these GTIs -- Governance Token Offerings. GTI solves many problems of ICO because
Tokens have utility (i.e. governance) from day one, and
They push for decentralized ownership -- at least at first glance.
Everyone who participates in the platform is entitled to earn some of these tokens. In many cases, the company launching the platform quickly formed a DAO (Decentralized Autonomous Organization) and handed over governance and ultimate control of the platform to the token holders.
By issuing tokens with built-in utility on the operating platform, these new DeFi projects solve two key problems - very smart!
I'm afraid I'm afraid not
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Risks of DeFi
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Photo: Johannes Plenio via Pexels.
As you can imagine, this trend carries huge risks, because there is no such thing as a free lunch - and we all know it.
But there are also market risks, such as the volatility of some of the cryptocurrencies involved in these systems. If your collateral falls below a breaking point, a sudden plunge in the price of an asset could set off a chain reaction and force liquidation. You see, asset prices are crucial in these systems - as are market prices that feed into these systems: the oracle problem. Oracles are the interface between smart contracts on the blockchain and external data, such as prices from centralized exchanges. If these oracles have a bug, are hacked or manipulated with fake data from the outside world - then chaos could ensue.
Typically, this is a combination of technical risk and market risk, perhaps coupled with low liquidity in certain assets, creating opportunities for fraudsters, such as the bZx hack.
Then there are other, more subtle risks and issues for holders of smaller numbers of tokens that raise interesting questions on a broader scale. I want to explore these questions in the rest of this article.
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subtle question..."Let's start with the stance again. Wouldn’t it be cool if users of the platform use their own tokens to govern the platform as described in the white paper? In theory: yes. It sounds very decentralized and democratic, doesn't it? Well, there are also some disadvantages in practice, such as."You need quite a few tokens to make your transaction economically sound."All along, people have promised that DeFi should", to help developing countries build an open financial system. then, have
small pocket
Shouldn’t token holders also be able to get a share of the profits from these platforms and their incentives? Or even better. Should these systems be designed for these users in the first place?
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DeFi Lockup -- Born for Big Investors?
Well, let's assume that doesn't happen -- let's say middle-class Americans. Joe. Let's say Joe has a deposit of $50,000. Despite warnings that he would use at most 1-2% of his savings to buy cryptocurrencies, Joe is an enthusiast and a big believer in DeFi. He's crazy and invests 20% of his savings into crypto - that's $10,000. But Joe is not stupid, he knows that most valuations are deeply dependent on Bitcoin and Ethereum. So, 90% of his portfolio is invested in major assets like BTC and ETH. That leaves $1,000 for DeFi experiments.
Joe is a big fan of the 0x project. However, he knows that portfolio diversification is important. So, he puts 1/10 of his DeFi portfolio into the 0x project — that’s $100. The rest goes into other cool stuff. Now he wants to take a stake. He glanced at 0x's mortgage pool. He can choose one of only 11 staking pools and see their historical data -- and past reward share amounts. However, when Joe wants to dedicate his ZRX balance to one of the pools, he sees that at the current Gas fee for transactions on Ethereum, the transaction costs about $2 - remember: satking happens on-chain. $2 - which is a pretty big amount - 2% of his ZRX holdings. But Joe is a big fan of the project and wants to be a part of it - living the DeFi aspirations. Here's the problem: the resulting earnings won't cover his initial transaction costs for a long time.
In theory, Joe can switch the delegation pool and give his voting rights to others. In fact, he wouldn't do it because it would be prohibitively expensive for a small to medium token holder.
Below is the data (data as of August 8, 2020)
Well-known 0x staking pools such as DUST pool have earned 197 ETH in the past 6 months. It shares 30.5 ETH (15%) of it with its stakers. That's about $11.895 (ETH=$390). There are 37 million ZRX staked in this pool. This means that if you stake ZRX tokens in this pool, you can earn approximately $0.0032 per staked ZRX token over a 6-month period."De "ZRX is currently valued at $0.42. Therefore, Joe has about 238 ZRX tokens locked up if he invests $100. If he stakes his tokens, he will earn ZRX appreciation to a value of $0.76 within 6 months!
My conclusion is. If you don’t own at least $1,000 of ZRX, pegging doesn’t mean anything to you from an economic standpoint. But most projects don't expose this important aspect.
There is a big question mark behind it!
The recent development of DeFi makes me think that the participation in DeFi is mainly for large investors or venture capital to enter the market. It is attractive for large sums of money. Even delegations are rather uninterested in small holders.
So let's look at yield farming, if we see a similar pattern there.
first level title"ReFi "yield farming--born for big households?
So, let’s ask the question: Who stands to profit the most from a newly launched $500 million DeFi token? Guess it. The project still holds 40% of their tokens (worth $200 million). Therefore, governance can be used to guide the direction. And the big players are already leading the round. Token Daily's Twitter #43 also points in this direction - creating
Or the term Re-centralized Finance.
Image credit: Simone Conti/Twitter
summary
But let's be careful. If you take a closer look at the comments on twitter, you'll see: it's not that easy to analyze token distribution when delegation pools come into play and many token holders delegate their tokens. I certainly cannot confirm or dispute these figures. But I'm sure we'll see lively discussions about it!
first level title"summary"I don't want to speculate on how these developments in DeFi will determine the future path of the blockchain ecosystem. But I do believe that we are now at an interesting point in its overall evolution. Big corporations and institutional investors will be attracted. Even bigger money will find its way into crypto networks - and it will influence important decisions - for better or worse.
Simply pushing governance onto the blockchain and hoping for the best is clearly not enough.
one token one vote
It doesn't work at all. History will repeat itself and power will be centralized. We certainly need new ways of mass governing systems. New approaches must be tried, such as quadratic voting, to balance the play of power.
But now, even small steps can help improve the system.
DeFi projects should be more open about the token distribution and influence of venture capitalists or other large stakeholders."De "The DeFi project should give a clear statement of how many tokens you have to invest in at least in which time period to cover your investment cost.
