Liquidity mining with soaring users and assets in DeFi, angel or devil?

Editor's Note: This article comes fromVernacular Blockchain (ID: hellobtc), Author: Five Fireball Leader, reprinted by Odaily with authorization.

Editor's Note: This article comes from

Vernacular Blockchain (ID: hellobtc)

Vernacular Blockchain (ID: hellobtc)Fcoin, Author: Five Fireball Leader, reprinted by Odaily with authorization.

If you want to find another hottest topic in the DeFi circle, then it must be the five words "liquidity mining".

These five words are often associated with hundreds of millions or even billions of dollars in funds. When we Chinese insiders hear these five words, the first thing that pops up in our minds is often that we have failed."

"The word.

So in the end, the liquid mining that is so hot that it explodes is an angel? Or the devil?

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What is Liquidity Mining? (Specifically refers to the Ethereum DeFi ecosystem)

This mobility can take many forms:

Liquidity mining on Uniswap and Balancer is to inject tokens into the trading Token pool to provide liquidity, and then get part of the transaction fee as a reward. Balancer will also provide Balancer’s native Token Bal in addition to the fee. The two DEXs belong to the most "orthodox" liquidity mining.

In addition, in fact, there are projects like mining with oracle machine quotations, and YAM, which has failed in the past two days, is directly pledged, or deposits are mined (YAM is more like a Token distribution method, itself It is more like PoS staking, which does not provide liquidity to the ecology, so it is actually a bit far-fetched to be classified as liquidity mining).

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Pros and Cons of Liquidity Mining

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Angel end

1. Fire! fire! fire!

Now that DeFi is so hot, many old projects are greedy, and they have started to transform into DeFi. Even if they can’t transfer, they have to fight hard. Not to mention, the effect is really good. At least the moment the news is announced, the currency price is directly pulled. Get up for a while.

In the DeFi circle, if any project starts liquidity mining, it will have the same effect as which project outside the DeFi circle embraces the thigh of DeFi, and the currency price will immediately increase.

There is no way, this is the Fomo effect brought about by hot spots, just like the wave of platform tokens soaring last year, what kind of third-, fourth-, and eighteenth-tier platforms open a new platform, and the platform tokens can also pull a wave.

Since Compound launched liquidity mining in June, in just 20 days, the locked-up amount has increased from 180 million to 650 million, and the number of users has soared to 6,000.

Balancer is even more exaggerated. When there was no liquidity mining two months ago, there were only more than 1,000 users, and the asset liquidity was about 20 million. Since the liquidity mining was started, the number of users has soared to 20,000, and the asset liquidity has reached 350 million US dollars. , both figures have increased by more than 10 times.

2. Back-feeding for ecology

If liquidity mining is just a gimmick or a concept, it must not be so popular. It is popular for a reason.

As we all know, when users choose a trading platform, in addition to external factors such as interface and handling fees, the most important factors are the following two factors (assuming that the transaction speed is similar):

Transaction price - the closer the transaction price is to the current market price, the better, that is, the smaller the slippage (buy-ask spread), the better the liquidity.

Trading Depth - Trading depth can be used to measure the price stability of the market. The greater the depth, the smaller the impact of a certain number of transactions on the price, and the more it can accommodate larger capital in and out, which is especially important for large investors.

Take the current hottest AMM DEX (Uniswap, Balancer, Curve), etc., their weapon against CEX (centralized trading platform), one is that it is easy to list coins and easy to operate. Another very important reason is that in terms of the depth of many currencies, these trading platforms surpass most second- and third-tier CEXs. Curve’s stable currency exchange depth even kills the three major trading platforms.

There is no free lunch in the world. AMM can attract enough funds to provide liquidity support, relying on the weapon of liquidity mining. You come to deposit funds with me to provide liquidity, and I will give you my Token or It is a handling fee.

As users, what they perceive is ultra-low slippage and sufficient depth, and the trading experience has been qualitatively improved.

The same is true for Compound. It is true that many people come here for rewards, but invisibly, people who want to borrow money also enjoy better interest rates because of these "free money parties". The amount of funds, so it has a qualitative improvement for the entire DeFi ecosystem, especially the experience of end users.

The currency circle has experienced from ICO to various IXOs later, and now ushered in the new Token distribution method of "liquidity mining". ,

For the project side, this may be the best way to start a cold start. First, it can gather attention and popularity in a short period of time. Second, it can issue tokens at almost zero cost to reward income farmers who provide liquidity for DeFi. Third, The anchoring and capture of Token value is accomplished by the market itself, which can be said to kill three birds with one stone.

For users, there is no longer any need to worry about the food chain where big fish eat small fish, such as seeds cutting angels, angels cutting private M, and private M cutting public M. At the beginning, everyone was basically on the same starting line. If you are optimistic about the project, you can choose to buy it in the secondary market or choose liquidity mining. Compared with various IXOs, it is much fairer.

Another hallmark feature of DeFi is composability - some time ago, Synthetix, Curve and Ren jointly organized a mining reward activity, that is, by providing liquidity for sBTC on Ethereum to obtain 4 kinds of Token rewards.

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devil end

1. Incentives are mostly given to arbitrageurs instead of creating real demand

This Compound can be used as a typical example—it is true that, as mentioned above, after the liquidity mining was started, there were a large number of arbitrageurs, which made the amount of funds that can be borrowed and the level of interest rates both qualitatively improved.

However, the design of Compound is that both borrowing and lending can get Comp rewards. As a result, the vast majority of users in the entire system come to arbitrage, frantically releasing and repaying loans, paying interest with their left hand, and collecting interest with their right hand.

For a period of time, 80% of the output of Comp was sold in this way by several big BAT users with hundreds of millions of BAT.

Relatively speaking, the liquidity mining mechanism design of Balancer and Curve is much better. It can be said that the rewards are indeed given to those "liquidity providers who improve the user's trading experience by increasing the depth of the supply pool".

But in any case, one of the unavoidable problems of liquidity mining is that it is easy to be monopolized by asset giant whales or large amounts, especially in recent days, the handling fee of ETH has reached an astonishing $20, and the gas fee for calling contracts is even higher. Breaking through 100 easily makes retail investors with small funds often lose more than they gain when conducting liquidity mining.

2. User threshold is too high

Liquidity mining can be said to be another threshold built on top of the DEX threshold.

All the impressions or knowledge of many old users about the currency circle are Huobi and Binance. When they first use Uniswap, they are not used to it. , to accelerate the GAS after the transaction... This has stumped at least half of the users.

Want to play liquidity mining? After you use Uniswap proficiently, the threshold here will at least kill more than half of the people...

For example, AMPL, which was very popular some time ago, provided excess liquidity rewards on Uniswap. You can choose to add AMPL+ETH Token to the liquidity pool on Uniswap in exchange for ordinary rewards. You can also go to AMPL’s official website to mortgage the liquidity that Uniswap sends you. Prove Token and exchange for excess rewards again.

There is also the previous Internet celebrity Yearn.finance, if there is no detailed tutorial when mining at the beginning, it is estimated that users who have not mined before facing the homepage, and those several different liquidity pools will be confused. which pool? What is the difference between each pool, annualization and risk? How to do it? ...

3. Ultra high risk - the pros and cons of high return

A few days ago, YAM, which dominates the screen, once again detonated the entire DeFi circle with a super high annual rate of 6000% at the beginning. A contract that has not yet passed the security audit attracted 200 million US dollars to enter the market in less than 6 hours. The 8 coins mined like Compound, SNX, etc. are also soaring all the way. However, in just a few hours, this feast came to an abrupt end. The supply is many times larger, causing the currency price to almost clear in a short period of time.

For the "miners" involved in mining, there is basically no loss, but the users who take orders in the secondary market are pitiful.

The code without security audit can attract such a huge amount of funds, is it the user's fault? Or the project party? Or DeFi itself?

Of course, this is not the first time that DeFi or liquidity mining has had an accident. As early as April this year, Lendf.me of the DF protocol was hacked, resulting in $25 million in assets being withdrawn from the contract. Fortunately, the assets were all recovered in the end, so there was no danger.

In June of this year, miners involved in Compound mining were accidentally liquidated due to improper setting of the pledge rate, and lost tens of thousands of dollars.

Some time ago, the Internet celebrity YFI, after it became popular, several imitations appeared, and many people were attracted to mine. As a result, they ran away and plummeted, whether it was investors in the secondary market or participating in mining. users suffered heavy losses.

The founder of Litecoin, Li Qiwei, is not very optimistic about DeFi. The main reason is the risk. He said that the decentralized DeFi is precisely its Achilles heel.