Original title: "Liquidity Mining Is Dead. What Comes Next?"

Author: Andrew Thurman

Original compilation: James, chain catcher

At present, it seems that liquidity mining has run out of oil, and various sub-industries in the cryptocurrency field are keen to find alternatives to it.

The main driving force behind the "DeFi Summer" boom in 2020 is actually liquidity mining. This concept refers to users providing liquidity for the platform, such as pledging Stablecoins or valuable Tokens, and then trading, lending, and borrowing on the platform. You can get the Token sent by the platform as a reward.

However, in recent months, liquidity mining has turned into an "imprecise" incentive tool, and even drew fierce criticism from a group of Ethereum miners. As a result, a large number of new projects have begun to emerge as alternatives to liquidity mining, such as bonds, time-weighted voting systems, and Stablecoin issuers focusing on "DAO-DAO"-these updated projects are likely to Forever changing the way DeFi protocols attract staking.

According to different projects, the mechanism that can really play a role may be called "liquidity as a service", or it can be said to be "protocol control value" or even "DeFi 2.0", but no matter how you name it, the basic principles It's all the same: manage the large amounts of money you get through incentives.

These efforts seem to be an attempt to answer a seemingly simple question: Until now, "free" money has been behind the scenes that drove the adoption of DeFi. So what is the more precise way?

With the arrival of the new year, projects that can solve the above problems have become the most popular projects for traders and investors. Protocols that focus on attracting liquidity have gained popularity despite the market downturn. Some believe that this trend is also in line with the development of Web 3, that is, value can be exploited and commoditized like information on the Internet.

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Whoever Controls Liquidity Controls DeFi

Some other investment institutions, such as venture capital eGirl Capital, believe that liquidity trading is outdated. Whether liquidity-as-a-service finally becomes a fad, a short-lived boost in the capricious cryptocurrency economy, or becomes the new cornerstone of on-chain market structure, at least for now, the struggle to control staking flows in the DeFi space A revolutionary arms race is essentially a battle for a $230 billion industry.

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However, liquidity mining appears to be outdated

From a usage protocol perspective, at first liquidity mining seemed to represent the future of project mining product-market fit.

During the "DeFi craze" in the summer of 2020, the DeFi protocol Compound started the craze by using COMP Token rewards to increase the staking return rate of its lending platform. Backed by similar incentive schemes, protocols such as Sushi have managed to temporarily overtake their competitor Uniswap.

However, critics have recently pointed out that while distributing large rewards to users will certainly incentivize staking in the short term, liquidity mining is an imperfect tool that also attracts what prolific DeFi developer Andre Cronje calls " Liquidity Locusts" - the so-called "temporary miners", once the Token is drained, they will take their rewards and go to the next Token pool.

Deribit Insights researcher Hasu said on a recent podcast: “I think yield farming is one of the dumbest things that’s happened to crypto so far.

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Core users are the key?

In contrast, a new crop of projects leveraging liquidity has made returns more transparent. They tried to count how many dollars of Token rewards were paid in the agreement, and how many dollars of pledges were attracted. In some cases, they are effectively bringing the liquidity of the protocol under the direct control of the DAO.

The first of these alternative yield mining schemes came about by accident.

Automated market maker Curve launched a "Voting Lock" feature in August 2020, which allows CRV Token holders to lock their Tokens for up to four years in exchange for veCRV (voting escrowed CRV). Conversely, VeCRV can vote for which liquidity pools can get CRV rewards, and the voting rights will be biased towards those who lock their own Token for a longer period of time.

During that time, it appeared to be a tool for individual miners to maximize their rate of return: by locking up a portion of their CRV rewards, they could direct more of the rewards to their favorite mining pools, and in the long run miners could earn Bigger profits. However, to the contrary, other protocols have proven to be the main beneficiaries of the system, rather than individual miners. People are competing to accumulate CRV Token in this competition called "Curve Wars".

According to an unnamed analyst, this vote-locking system — also known as the “Ve economy model” — “pretends to choose time preference, but actually focuses governance on who can accumulate the most tokens.” .”

In short, whoever accumulates the most veCRV controls the release of CRV rewards.

Currently, the “king maker” protocol that controls Curve rewards is Convex Finance. According to data from Dune Analytics, Convex accounts for 43% of the total circulation of CRV Token, which is an astonishing proportion. Among the voting rights, 1 Convex governance token CVX is equivalent to 5.1 CRV Tokens.

In fact, Curve and Convex are also the two largest protocols in DeFi. According to data from DefiLlama, the total lock-up volume of these two protocols has reached 40 billion US dollars.

Predictably, a "new industry" quickly emerged on the market as a result: in the use of platforms such as Votium, where protocols can be used to "bribe" voting escrow CVX holders to transfer liquidity Channel into the pool of money that is important to them.

In fact, "bribing" with deposits has obvious benefits for DeFi protocols.

As an example, with a Stablecoin like Terra's UST, the deposits in the Curve pool actually help UST ensure a healthy, liquid market, help UST maintain its peg to the dollar and create utility for the Stablecoin - enabling a liquidity mining program All possible goals, while costs, rewards and goals become more transparent.

In fact, in a recent governance forum post, UST Stablecoin team members concluded that the protocol’s ongoing plans to incentivize deposits via CVX “bribes” and accumulate CVX tokens are “going very well.”

According to some, these benefits mean that “DeFi Ve economics” may be here to stay.

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Is "bribing" the DeFi ecosystem reliable?

After the emergence of the emerging "bribe" economy, many new products are coming to market. They act as governance or voting intermediaries in the evolving technology stack and are dedicated to helping protocols route and control liquidity. These products are: Warden, Bribe, Llama Airforce, Votium, and Votemak.

Among them, Votemak was recently acquired by Redacted, and the governance market platform Bribe also recently announced the completion of a $4 million seed round of financing to help build the VEV protocol. Spartan Group led the round of financing, and Dragonfly and Rarestone Capital also participated.

Frankly speaking, part of the reason for the rise of these projects may be that other DeFi projects have implemented "variant" Ve economic models, thereby creating more market demand so that DeFi protocols can obtain liquidity by buying tickets —

Tokemak is one such project. The protocol aims to be a decentralized market maker: users deposit funds and get TOKE Token as a reward. Token can be used to vote to decide which DeFi protocol to deploy liquidity on. Therefore, for those DeFI agreements that hope to guide liquidity through "bribery", Tokemak has now become another target for them to "stare at". At the same time, other projects (such as Frax and Yearn) have also begun to try to introduce Ve-style economic models.

Condorcet, the anonymous founder of the Bribe protocol, said: "Retail investors can understand what we are doing and the importance of doing it. They want to get bribes like the people behind, so we do it." Tokemak will be Bribe's first One of the results of integration.

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Token control

While some DeFi protocols are playing the “bribery” game, trying to direct liquidity to pools that are beneficial to them, others have chosen to directly control liquidity—an emerging trend where “protocols own mobility".

Algorithmic Stablecoin project Fei Protocol is partnering with Ondo Finance, a DeFi protocol focused on mitigating impermanent loss risk transfer, with the aim of building a product that will allow the protocol to pair native governance tokens in treasury with Fei’s Stablecoin to directly create Liquidity pool.

This means that DeFi protocols can directly create liquidity pools, rather than having the protocol generate user deposits in the liquidity pool - and crucially, doing so also allows the protocol to retain a portion of transaction fees from the liquidity pool , thereby creating new sources of income.

This logic has been applied to Olympus's bond program Olympus Pro, in which the Olympus protocol exchanges bonds with liquidity pool positions, and then allows the protocol to control the liquidity of its Token and earn transaction fees.

Joey Santoro, the founder of Fei Protocol, explained that this is part of the emerging "direct-to-DAO" service, that is, allowing third parties to help DAO to more effectively guide its Token liquidity and other needs .

Protocol-owned liquidity is becoming a vertical in itself, and Olympus and its various forked protocols, including protocols such as Wonderland and Redacted, have accumulated a large amount of CVX Token and other tokens with "bribe" income potential to send It is hoped that the Token reserve can be used to generate returns in the future.

In a recent tweet, Wonderland protocol developer Daniele Sestagalli (Daniele Sestagalli) admitted frankly that they are moving away from Olympus' much-maligned "annualized income plan."

Meanwhile, Redacted's 0xSami said he hopes the protocol will become a "meta governance token" that enables projects to become a single asset. In fact, Redacted has already begun to do this. For example, their "meta-governance token" BTRFLY has played a leading role in multiple governance processes. The agreement treasury earns fees through this service, and these fees can be exchanged through bonds or similar financial instruments. Tools are redistributed. 0xSami further stated:

“Obviously, we now need a high annualized return to gain a competitive advantage in the market. However, once the treasury is established, Token doesn’t even need to adopt a rebase distribution mechanism—because we can introduce a project with sustainable returns.”

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Layer 2 extensions

Oddly enough, until recently, most of the experiments in "liquidity as a service" were focused on Ethereum. You must know that many alternative Layer 1s are still running incentive plans, and they still use traditional liquidity mining tools, so the efficiency is extremely low-it can be said that now is the best time to subvert the traditional DeFi model, and this time It is already relatively mature.

When talking about the Ethereum alternative chain, Joey Santoro said: "I think you will see exactly the same statement - by releasing the governance Token for income farming, it will become a kind of liquidity owned by the DeFi agreement. form."

Allocate your tokens to the platform, and then fuel the future development of the platform - this is undoubtedly a very powerful concept.

In fact, DeFi protocols that deploy the "Ve economic model" have already begun to appear in other ecosystems. For example, Andre Cronje and Sestagalli are collaborating on a yet-to-be-announced Fantom-based project, currently called ve(3,3)—essentially a mashup of the “Ve economy model” and the Olympus staking scheme.

The unreleased project has already shown huge popularity, but just this Tuesday (January 18th), a new project called veDAO appeared, which aims to gain the majority control of the ve(3,3) protocol. Equity, the total value of the agreement locked in just a few hours exceeded 785 million US dollars.

At the same time, Joey Santoro said that Fei Protocol is planning to choose a Layer 2 to migrate its ecosystem. He believes that this approach is very beneficial to Fei Protocol and can promote them to continue to be the field of liquidity mining alternatives leaders in. Joey Santoro says:

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Where is the future?

Although "Liquidity as a Service" is currently one of the fastest growing fields in cryptocurrency, the problem is that even those who work in this field don't know whether "Liquidity as a Service" can be the key to driving crypto projects. s future.

0xSami, the founder of Redacted, believes that projects such as Curve and Tokemak, which have become central hubs of liquidity through incentive plans, will either win most of the market share in the future, or will disappear completely. He said:

“For DeFi projects like Curve and Tokemak, either one of them becomes the ultimate liquidity center, or the narrative is exhausted, and then one by one dies.”

In recent weeks, some analysts have also pointed out that while many DeFi protocols have higher locked positions than ever before, as low-fee Uniswap v3 pools continue to encroach on Curve's "territory", Curve's Stablecoin Swap transaction volume (also its market The cornerstone of market share) has actually been declining.

An analyst who asked not to be named also expressed doubts about the victory of the Ve-style economic model, saying that ve-token is not "optimized for the right things", but "liquidity governance and Token release control are unbelievable". One analyst said:

“This is Curve’s greatest gift to the DeFi ecosystem — being able to distribute your Tokens to the platform in the form of liquidity release, which is conducive to promoting the future growth of the platform, is undoubtedly a very powerful concept,”

At the same time, Joey Santoro believes that the final development result of the DeFi market may not be a single winner, but a world with multiple competing joint projects, all of which have a lot of liquidity.

“I guess it’s not going to be a monopoly, it’s a bunch of competing ecosystems. It’s part of the consolidation narrative of the DeFi market. You’re going to see Tokemaks, Olympuses, Tribe DAOs, Curves absorb liquidity and control, and DAOs that align with them will also benefit.”

Even if the results are uncertain, some projects that emerged during the boom period of liquidity mining let us know how to attract and motivate users. Although the Ve-style economic model is misleading to a certain extent, who doesn’t want to retain liquidity?

Joey Santoro finally said meaningfully——

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