(A road with cypresses, Van Gogh)
DeFi 2.0 Liquidity Relationship Reconstruction
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Overmining of Liquidity Mining
The pace of DeFi is fast. Last year we witnessed a surge of DeFi, when DeFi adopted the liquidity mining model, detonating the entire encryption field. However, with the exploration of the liquidity mining model, people have gradually discovered the disadvantages of liquidity mining. This short-term incentive model will lead to overexploitation of projects and agreements by some liquidity providers, and even accelerate the demise of projects.
In this model, the long-term interests of the liquidity provider and the agreement are not consistent, and the existence of this contradiction leads to the slow growth of DeFi. Of course, this is only one of the reasons.
DeFi2.0 has changed the relationship between the agreement and the liquidity provider through a new mechanism, and finally reconstructed the liquidity service itself.
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People generally pay attention to the capture of protocol fees, but from the perspective of the long-term sustainable development of the protocol, the liquidity capture of the protocol is equally important, or even more important. The liquidity capture of the agreement is an important part of the distinction between DeFi 1.0 and 2.0; the other is the improvement of capital efficiency.
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*Liquidity capture
The reason why DeFi can become DeFi, in addition to the underlying public chain infrastructure such as Ethereum, the most important thing is the provision of liquidity. This is the prerequisite for DeFi to operate, and it is the blood that supports its life. This is also an important reason why in the summer of 2020, after Compound launched liquidity mining, it detonated the entire market.
With more than a year of practice, people have seen the disadvantages of liquidity mining, and the short-term incentive model will only encourage short-term behavior of liquidity providers. The additional issuance of tokens enters the hands of liquidity providers. In many cases, liquidity providers have not formed a long-term mutually beneficial cooperative relationship with the agreement. Liquidity providers can retreat at any time and leave the protocol with a feather.
To solve this problem, the concept of POL (Protocol Owned Liquidity) emerged, which is the liquidity controlled by the protocol. Blue Fox Notes calls it "liquidity capture". There are even "liquidity layer" services that focus on providing a liquid infrastructure layer for DeFi projects.
PCV and POLThe POL mentioned above refers to the Protocol Owned Liquidity (Protocol Owned Liquidity), which is the first concept practiced by Olympus DAO. Regarding Olympus DAO, Blue Fox Notes introduced "Olympus DAO" earlier this yearOHM's Algorithmic Stablecoin Exploration
". But today's Olympus has changed a lot.
Olympus DAO issues OHM tokens (bonds) at discounted prices to participants to obtain LP token positions from liquidity providers, thereby capturing "liquidity". Olympus DAO's treasury holds liquidity, and although its OHM is increasing, the more bonds it sells, the more liquidity it holds. As of now, Olympus DAO has over $460 million in liquidity.
(Olympus protocol has over $460 million in liquidity, DuneAnalytics)
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The "liquidity" captured by the agreement is not freely controlled by the LP, but is controlled by the agreement, which means that there will be no "rug pull" in which the liquidity suddenly disappears, thus ensuring the possibility of withdrawal of the participants. At the same time, the agreement participates in the provision of liquidity and becomes a market maker, which can obtain transaction fee income. So far, the fee income has exceeded 10 million US dollars.
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(LP revenue captured by Olympus protocol, DuneAnalytics)
Better liquidity can enhance the confidence of participants to continue participating, and there is no need to worry about the sudden disappearance of liquidity one day. This is also a common situation of rug pull in the early DeFi mining era, which caused heavy losses for many participants.
Of course, this is not completely safe, but relatively speaking, it is better than the previous liquidity support. With the success of Olympus DAO, there are now as many as a dozen similar projects on various chains, and the risks involved will become higher and higher. The Olympus DAO model cannot guarantee that there will be no Rug Pull.
Based on the successful practice of Olympus DAO itself, it also launched a liquidity service product that can be adopted by other DeFi protocols. Other projects can achieve "liquidity capture" similar to Olympus DAO. At the same time, for Olympus, its token OHM can also be embedded in more protocols to form more application scenarios. For this method, some people even proposed the concept of Liquidity as a Service. That is, the further evolution of the DeFi liquidity solution mentioned below.
Protocols focused on liquidity provision
The concept of LaaS liquidity as a service was mentioned above. Other DeFi protocols can purchase liquidity from the market, and the market will compete to provide liquidity with higher quality and better price, forming a relatively balanced state.
Tokemak is one of those protocols that focuses on liquidity provision. In short, it tries to become a market maker for DeFi projects and an infrastructure layer for DeFi's liquidity provision.
On the TokeMak protocol, it can collect various idle tokens, and participants can provide unilateral tokens, including ETH, DAI and other tokens, as well as tokens of different protocol projects. These tokens can form token pairs to provide liquidity. Each token asset has its own "reactor" (when a liquidity provider deposits a certain token asset, it will receive a corresponding amount of t assets, which can be redeemed 1:1). TokeMark's protocol token TOKE acts as a guide for liquidity, which can also be understood as tokenizing liquidity. TOKE controls the flow of liquidity.
For DeFi projects, TokeMak can build a "token reactor" at a lower cost to build sustainable liquidity; for liquidity providers, it can provide unilateral token liquidity without worrying about impermanent losses. Ultimately, it hopes that various protocols will no longer build their own liquidity pools, but obtain liquidity through TokeMak.
For liquidity providers, they deposit tokens into the "token reactor" and can obtain the reward income of the protocol token TOKE. These deposited "reactor" token assets are paired with assets such as ETH or DAI, and deployed to DEX. These tokens deposited in the "reactor" can be redeemed 1:1. So, if there is an impermanent loss, who will bear it? This involves TOKE tokens. TOKE token is Tokemak's protocol token, which not only has governance functions, but also serves as rewards for liquidity providers. TOKE tokens can capture liquidity transaction fees, which is the key to supporting its value. At the same time, it is also used to mitigate impermanence loss.
If there is an impermanent loss when a certain "reactor token" is withdrawn, then TOKE will support the payment. TokeMak adopts a mortgage network to mitigate impermanent losses. In TokeMak's design, in addition to liquidity providers, there are also liquidity guides. Liquidity guides guide liquidity by staking TOKE, and during this process, liquidity guides will be rewarded with TOKE tokens. If impermanent loss occurs, it will first be supported by the protocol treasury, and finally it will be supported by the TOKE rewards of the TOKE pledger (liquidity guide), and if this is not enough, it will be supported by the TOKE of the TOKE pledger (in proportion) .
The Fei protocol also tries to provide liquidity services. It cooperates with some DeFi projects to provide them with liquidity leasing. For example, deposit its tokens into other DeFi liquidity treasuries for a period of time, and then provide liquidity of "project tokens/FEI" on DEX. Of course, at the same time, FEI can also charge certain fees and transaction fees, but there are also potential impermanent losses.
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Asset Efficiency Optimization of DeFi 2.0
Due to the disintermediation model of DeFi, it is often necessary to provide over-collateralized assets. There is asset inefficiency here.
In addition to improving the utilization rate of funds, it also reduces the possibility of liquidation. Because these collateral assets will increase in value. This is a type of innovation based on user needs.
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Risks of DeFi2.0
In addition, DeFi2.0 cannot guarantee that there will be no rug pull. Before the formation of its own sustainable liquidity, risks are everywhere. Therefore, don't be fooled by the concept of DeFi2.0, which is also full of extremely high risks.
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DeFi2.0 essentially needs to improve the infrastructure layer of DeFi
The infrastructure of DeFi includes not only public chains such as Ethereum, but also basic Lego building blocks such as DEX, lending, and derivatives. It also includes the liquidity that supports these models. Liquidity itself is also an important infrastructure layer for the sustainability of DeFi.
