Written by: Pan Zhixiong

A year ago, decentralized finance (DeFi) began to receive widespread attention from the cryptocurrency community, but without the influence of the concepts of "Liquidity Mining" and "Yield Farming", the DeFi ecosystem might not have With such a rapid development in this year, it is very likely that there will be no later "DeFi Summer".

Looking back on the achievements of this year, the development speed of the DeFi ecosystem is beyond imagination. Just a few examples of data can be found to be hundreds of times. For example, the amount of borrowed funds has increased by 170 times, and the number of trading users has increased by 140 times. The total amount of assets in DeFi's smart contracts has increased by 140 times, and so on.

Although the term "liquidity mining" was not invented by Compound, nor was it the first mechanism they adopted, Compound is the most important promoter of this matter. The information about liquidity mining that can be searched on the Internet is almost all after Compound launched "borrowing is mining". From this point of time, it is exactly one year from now.

Since then, liquidity mining has become the most worthwhile mechanism in the initial stage of the DeFi protocol, and even a set of standard "templates". Many projects will be based on this set of templates and fine-tuned with their own characteristics.

Users participating in "liquidity mining" are divided into two categories:

• One type is a large whale or smart pool of "mining, selling and withdrawing", which directly sells the obtained token rewards for cash;

• The other category is users who expect to participate in the distribution of tokens in the primary market through this method, and can grow together with the project through this mechanism.

The opposite point of view is that the "matryoshka" risk brought about by this mechanism (such as mutual mining between protocols) may increase the system risk of the entire DeFi ecosystem, and the distribution method may be too large if it is not precisely designed. The growth of the early overdraft agreement. Just like Uniswap stopped after trying several liquidity mining activities, and did not launch new activities until the V3 version was released, perhaps it is also designing a more reasonable solution.

In any case, this mechanism has mobilized the enthusiasm of the cryptocurrency community and users to participate in the DeFi protocol, and has become an indispensable part of all new projects.

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Who invented the term liquidity mining?

To explore the earliest origin of the term Liquidity Mining, the source that can be checked is the open source automated trading tool Hummingbot. Everyone started using this vocabulary in June 2020, and the Hummingbot team was more than half a year earlier than that.

Hummingbot is a tool for professional users, so ordinary users may not know it.

Reference reading:

Reference reading:

《Introducing Liquidity Mining》

https://hummingbot.io/blog/2019-11-liquidity-mining

In the earliest definition of Hummingbot, "liquidity mining" specifically refers to providing liquidity for exchanges. Later, the DeFi industry further generalized the concept of this word, which can be used in lending or other financial applications, because these services also require One party provides liquidity. Later, another new term gradually evolved: "Yield Farming".

Hummingbot's definition of "liquidity mining" is very precise and complete, here is their explanation:

“We call this thing ‘liquidity mining’ because its concept is very similar to PoW mining. Compared to using mining machines and electricity, liquidity mining uses computing resources and token inventory to run Hummingbot’s Market-making client. By competing with other participants for economic incentives, their joint efforts can achieve a common goal of providing liquidity for specific tokens and exchanges. In return, they will, according to the model defined by the algorithm, receive compensation commensurate with their work.”

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Which DeFi project was the first to adopt liquidity?

Reference reading:

Reference reading:

《New Uniswap sETH LP reward system》

https://blog.synthetix.io/new-uniswap-seth-lp-reward-system/

Synthetix didn't use the term "liquidity mining" at that time, but called it "LP reward system", where LP is the abbreviation of liquidity provider, and later they also used "liquidity incentive test" and so on. term to describe liquidity mining activities.

In terms of mechanism, the incentive activity launched by Synthetix is ​​similar to the later liquidity mining. The first activity is to reward users who provide synthetic asset liquidity on Uniswap. The first supported trading pair is sETH/ETH.

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Who ignited the liquidity mining boom?

Although the early liquidity mining was more about transaction-related scenarios, the decentralized lending protocol Compound is actually responsible for promoting the prosperity of liquidity mining.

Compound officially launched the distribution method of the governance token COMP during June 2020. For the first time, other DeFi protocols realized on a large scale that they can use the protocol's own governance token to promote the growth of the protocol's liquidity.

The mechanism is also relatively simple. As long as users routinely use Compound's lending protocol, they can be allocated a certain amount of governance token COMP according to the amount of borrowed funds. Of course, this mechanism has been adjusted many times since then.

Thanks to the fact that Compound itself is a large-scale and influential project in the DeFi protocol, and it has not disclosed its original token plan before, so when the community learned that Compound launched a "governance token with no real value", everyone All frenzied discussion and research.

At that time, Compound and the community did not call their mechanism "liquidity mining", but this did prompt other projects to use the "liquidity mining" mechanism later. If you search for the term "liquidity mining" on Lianwen, you will find that the time when this word appeared was around the time when Compound released their token distribution mechanism. This should not be a coincidence.

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Is liquidity mining the same as FCoin's "transaction mining"?

I remember that shortly after the launch of the concept of liquidity mining, there were many voices in the Chinese domestic community that this was actually the same as the "transaction mining" launched by FCoin in 2018. Some people even believed that the launch of "transaction mining" by FCoin It is the originator of "liquidity mining".

In fact, the core difference between the two concepts is still obvious. The "liquidity mining" realized by the blockchain based on transparent transaction data can ensure that the entire process is auditable and traceable, and the main reason why FCoin failed to support it is its chaotic centralized management and managed assets. The state is also not transparent enough.

More importantly, although the mechanisms adopted by the above three projects (Hummingbot, Synthetix, and Compound) are ultimately called "liquidity mining", they are essentially different mechanisms. Among them, Hummingbot's scheme is similar to FCoin transaction mining.

Data speaks: DeFi this year

Total lockup (TVL): 140 times

Total Locked Volume (TVL) is a core indicator for evaluating the liquidity and capacity of the DeFi ecosystem, that is, how much real money and assets everyone puts into the DeFi smart contract to increase the scale of the entire system.

Referring to DeBank data, as of June 1, 2020, the total lock-up volume of all DeFi at that time was 940 million US dollars, and the highest peak was on May 11, 2021, when the total lock-up volume was 131.4 billion US dollars, a year within 140 times.

Total loan amount: 170 times

There is a type of agreement in DeFi that specializes in providing over-collateralized lending services, and its total borrowing amount can reflect the scale of mortgages and loans of this type of agreement.

Based on June 1, 2020, the total borrowings of all DeFi at that time were 150 million US dollars, and the highest peak was on May 9, 2021, when the total borrowings were 26.7 billion US dollars, an increase of more than 170 times within one year .

Number of trading users: 140 times

The transaction protocol is also the most important facility in the DeFi ecosystem, so the number of users using the transaction protocol (calculated by independent addresses) can reflect the user scale of the entire DeFi ecosystem.

Based on June 1, 2020, the number of users of all DeFi trading protocols on that day was more than 6,200, and the peak was on May 11, 2021, when the number of trading users on that day was 850,000, an increase of nearly 140 times.

Trading volume: 1000 times

For transaction protocols, transaction volume is also a very intuitive criterion. Especially since the launch of the Binance Smart Chain (BSC) this year, the transaction volume of the transaction protocols in its network has increased exaggeratedly.

Based on May 31, 2020, the transaction volume of all agreements on that day was 22.3 million US dollars, and the highest peak was May 29, 2021, when the transaction volume on that day was 23 billion US dollars, an increase of more than 1,000 times within one year.

Gas Price: up to 18 times

In fact, before DeFi Summer, Gas Price, which marked the price of the Ethereum network, had grown significantly, from single-digit GWei levels to tens of GWei levels. However, after the liquid mining started, the Gas Price was still growing rapidly, and there was no downward trend until recently.

Referring to Blockchair’s data, on June 1, 2020, the median Gas Price on that day was 30 GWei, and the highest peak was on September 17, 2020, when the average daily Gas Price was 544 GWei, an 18-fold increase in 3 months.

Interestingly, on September 17, 2020, Uniswap announced the issuance of governance tokens and conducted airdrops, so there were a large number of on-chain transactions for receiving UNI airdrop tokens on that day.

Block capacity: increased three times, accumulatively increased by 50%

Different from Bitcoin, the block capacity of Ethereum can be adjusted according to miners' votes, so with the improvement of physical network, computing, and storage resources, miners can choose to continuously increase the capacity and throughput of the Ethereum network. .

Before June 2020, the capacity (Gas Limit) of each block of Ethereum was 10 million GWei, which was increased to 12 million GWei from June to July, and then increased to 12.5 million GWei at the end of July.

Until April this year, the block capacity was increased again to 15 million GWei, an increase of 50% compared to the same period last year.

Stablecoin issuance: 10x

The demand for stablecoins has also grown significantly, from the issuance of stablecoins of US$7.3 billion on June 1 last year to US$70.5 billion today, an increase of nearly 10 times in one year.

BTC cross-chain coin circulation: 48 times

With the development of DeFi, the demand for BTC on the Ethereum network has grown rapidly. After all, it is also a native encrypted asset with a very large user base and market value.

The issuance of BTC-anchored coins has grown from 5,200 BTC on June 1 last year to 250,000 BTC today, a 48-fold increase in one year.

Number of oracle calls: 500x

Oracles were not widely used before the rapid development of DeFi, but since DeFi Summer last year, the demand for oracles has also undergone tremendous changes.

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How will DeFi continue to grow?

Recently, we have seen the decline of the cryptocurrency market. One of the most obvious indicators is that the Gas Price is declining, and other data have also declined to various degrees. Does this mean that the DeFi ecology of Ethereum has hit the ceiling?

In fact, judging from the data, the current DeFi ecology is still in a baby state. Although the TVL of Ethereum has now dropped to a scale of 56 billion US dollars, more assets have not yet entered the DeFi ecology.

To do a simple calculation, if: "the market value of Ethereum + the market value of stablecoins and BTC on the Ethereum chain + the market value of the top 5 projects (UNI, LINK, MATIC, AMP, AAVE) with the largest market value on the Ethereum chain" , the scale is about 400 billion US dollars. In this way, $56 billion is only 14% of the $400 billion, and this does not even include the thousands of long-tail tokens on the Ethereum chain.

In addition to the scale of assets, the current Ethereum is limited by throughput, and many transaction applications have also encountered growth bottlenecks because they are "too expensive" and "too slow". Although the block capacity has increased by 50% this year, it is still far from being cheap and easy to use.

Fortunately, recently, various new-generation Layer 2 (two-layer network) protocols have finally been launched or will soon be launched, which will also become the core foundation for the next growth of DeFi. Under the new infrastructure, some more interesting mechanisms than "liquidity mining" will be born, which is worth waiting and watching.