"Liquidity mining" is about to set off a cold start incentive war in DeFi
Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom)Editor's Note: This article comes from
Chain News ChainNews (ID: chainnewscom)
Chain News ChainNews (ID: chainnewscom)
, Author: Andrew Kang, blockchain investor, Compiler: Zhan Juan, published with authorization.
This article was first published on Deribit, and Lianwen was authorized to publish the Chinese version
Building network effects is hard, and it’s especially hard in the cryptocurrency space because you’re either competing with strong existing players like exchanges, payment systems, or working with niche players like DApps. Emerging networks face a conundrum: a small network has limited utility to potential users, but increasing network size and utility depends on attracting new users.
As an example, let's imagine a typical start-up crypto exchange. Although some funds have been invested in market making, the depth of orders is still far lower than that of existing companies. Exchanges try to market to new traders, but market makers prefer to trade on more liquid exchanges where they can execute trades with less downside. Without pending orders, it is impossible to attract more market makers. Other market makers felt that trading on the new exchange was not a good deal, preferring to provide liquidity on other exchanges. Bootstrapping liquidity is a classic "chicken and egg" problem.
Behaviors that increase network utility are incentivized through native token rewards.
a false start
I call it "token-based network cold start". It can be applied to any application that benefits from network effects, from multiplayer games, to financial markets, to social networks. When this concept is specifically applied to incentivize market liquidity, it can be called "liquidity mining".
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a false start
For this model, traders on the exchange receive transaction fee rebates in the form of platform tokens. Oftentimes, traders receive bonuses in addition to receiving full trading fee rebates.
In other words, the exchange pays users transaction fees, but this is paid in tokens that have no production costs.
Trading volume exploded. FCoin launched their transaction fee mining program in early June - with almost negligible transaction volume compared to the volume immediately following.
Data source: CER
However, these plans actually only give the illusion of a massive increase in liquidity, as the incentives are primarily about driving brushing rather than providing order book depth and legitimate taker traffic. CER's research on transaction volume patterns, unique visitors, and web traffic showed that transaction volume was artificially inflated. This is bad for exchanges because instead of adding real volume and liquidity, they are wasting money on brush trading.
The failure of the transaction fee mining model and the subsequent failure of these exchanges has led to a lot of skepticism about the cold start of the token. However, the problem is not rewarding users for certain behaviors, but knowing which behaviors to reward.
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Can a better cold start mode be designed?
For these centralized exchanges, better models would include:
Provides true order book depth - Compensates for limit orders by taking into account time and volume on the book.
Attract real taker traffic - this can be achieved through better order book depth and a portion of transaction fees rebate via exchange tokens.
Avoid being exploited - you can't make money by swiping orders and "cheating the system".
While we have yet to see this improved model applied to centralized exchanges, we have seen variations of liquidity mining successfully applied to DeFi applications. The most notable example is SNX incentivizing the sETH/ETH liquidity pool on Uniswap.
A key component of the Synthetix ecosystem is a liquidity trading market for trading Synthetix synthetic assets, such as sBTC, sETH, sUSD, etc. The Synthetix Foundation will send part of the SNX token inflation to sETH's liquidity providers: ETH Uniswap pool.
The initiative was a huge success, with the sETH/ETH pool growing to $24 million at one point. During this period, it was by far the largest pool on Uniswap, accounting for ⅓ of the total Uniswap liquidity. The side that guides the market (the liquidity supply) naturally attracts the other side of the market—traders who buy and sell in this pool. Since then, the foundation and the community have reduced the rewards allocated to this incentive project by 95%, however, the sETH pool is still the largest pool on Uniswap V1 (excluding the scam project HEX).
A key difference, however, is that instead of subsidizing the good or service the startup provides with economic value, a token-based cold start rewards it with an asset tied to the value of the network—pseudo-equity in a sense. participants. Some participants may sell these rewards, however, participants who hold these rewards are essentially converted into "network shareholders".
in conclusion
These token holders have an increased likelihood of long-term engagement with the project and the potential to support the project as users and/or value-added investors. Both Balancer and Synthetix are seeing results from their incentive programs.
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