Simple understanding of DeFi liquidity mining
Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji), reprinted by Odaily with authorization.
Editor's Note: This article comes from
Blue Fox Notes (ID: lanhubiji)
, reprinted by Odaily with authorization.
Since Compound launched the liquidity mining of its governance token COMP on June 15, in less than a month, liquidity mining has become the hottest topic in the encryption circle, and more and more projects are launching their own liquidity mining , So, what is DeFi liquidity mining?
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The Explosion of Liquidity Mining
Compound liquidity mining has initially formed a siphon effect similar to a small black hole. As of the writing of Blue Fox Notes, the total deposits on Compound exceeded 1.39 billion U.S. dollars, an increase of about 10 times compared to 20 days ago; The number reached 4,248. In less than a month, the changes have been astounding.Compound surpasses Maker to become the project with the highest market value in DeFi: the DeFi drama begins》。
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Compound surpasses Maker to become the project with the highest market value in DeFi: the DeFi drama beginsBalancer takes over from Compound?》。
Balancer's liquidity has grown significantly
Balancer is the second project to launch liquidity mining after Compound recently. Its liquidity increased from less than US$20 million on June 5 to US$140 million on July 5, an increase of about 7 times in a month, making it the DEX project with the highest liquidity currently. At the same time, its The trading volume is also growing rapidly. Judging from its trading volume in the latest week, it has already ranked among the top three, second only to Uniswap and Curve, and there is a trend of continuing to climb. More articles on Balancer
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(Balancer's 7-day trading volume ranks among the top three DEX, Source:DuneAnalytics)
many on the road
In addition to the liquidity mining of Compound and Balancer, there are also mining of Curve, Bancor, Thorchain, mStable, bzx, Kava...etc. Mining in the entire DeFi field is spreading, and there are more on the way. Judging from the overall trend, liquidity mining will definitely be overheated. Some whales do not even keep the mined tokens after mining, and sell them directly to lock in the profits.
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What is DeFi liquidity mining?
First of all, what is DeFi?
DeFi is Decentralized Finance in English, that is, decentralized finance, or distributed finance. They are products that run on public chains such as Ethereum. These products have non-tamperable operating logic, that is to say, smart contracts that cannot be tampered with.
Why run on blockchains like Ethereum? Instead of independently developing financial products to provide services to users? Because public chains such as Ethereum are composed of thousands of nodes, each node maintains the same network status records and codes. All its transactions and states need to reach a consensus, and no single node can change the transaction history and state at will, nor can it change the contract code at will. Running financial products on the public chain means that it cannot be tampered with. At the same time, it does not require permission and everyone can participate. This is why DeFi is part of open finance. Finally, it is composable, and can be built, connected and combined based on these financial products, which leads to various innovations, which is why the term DeFi Lego often appears.
Secondly, what is liquidity mining?
All in all, liquidity mining is mainly to obtain income by providing token assets.
At present, the liquidity mining of DeFi is mainly a product that occurs on the Ethereum blockchain. It obtains income by providing liquidity for DeFi products on Ethereum. To put it simply, mining can be carried out by depositing certain token assets. The reason why it is called mining is also to follow the industry saying of Bitcoin mining. Liquidity mining on Compound is mainly for operations such as depositing tokens or lending tokens on it, so as to obtain rewards of COMP governance tokens. The COMP token represents the governance rights of the Compound protocol. COMP holders can vote on the direction of the Compound protocol. If the Compound business has value, then COMP has natural governance value.
Liquidity mining on Balancer is to provide liquidity for the trading token pool, such as providing liquidity for the BAL-WETH pool. The liquidity provider can deposit BAL and WETH according to a certain ratio (such as 80:20). WETH tokens, and then according to certain rules, get BAL tokens and related transaction fees.
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What are the benefits of liquidity mining?
The income from liquidity mining includes governance tokens, transaction fees, etc. Liquidity mining can simply obtain passive income by depositing tokens, but if you want to obtain higher income, it needs to be managed. The yields of different protocols are different, even between different currency markets or token pools of the same agreement. Benefits also vary widely.
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(Compound allocation rule adjustment, Source: Compound)
Balancer also had a similar experience. The price of BAL broke through $20 after listing, and now it fluctuates around $11. BAL is allocated 145,000 fixedly every week. Then, when the price of BAL is $20 and $10, the impact on the income of liquid mining is huge. Currently, in Balancer, the reward weights of BAL tokens in different liquidity pools are also different. For example, some token pools have a weight of 1, while others have a weight of only 0.08, which will lead to major differences in BAL distribution. Through the setting of this impact factor, it will have a guiding effect on the flow of funds, and giving higher weights to token pools with higher demand for high-quality exchanges is conducive to their positive development.
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Maximize income from liquidity mining
On Compound, for example, since it rewards lenders as well as borrowers, this allows users to leverage. Users deposit DAI, then lend DAI, then deposit DAI, and then lend DAI... There are currently about 170 million DAI in the market, and today the deposit of DAI on Compound reaches 568 million US dollars, and the total borrowing to $517 million. Of course, this also carries greater risks.
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(The total deposits and total borrowings of DAI on Compound have increased sharply in two days, Source:Compound)
In addition, users can also operate across protocols, such as lending tokens on Compound, and then providing liquidity for Balancer. If the income on Balancer and Compound exceeds the loan interest on Compound, it will be profitable.
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As more and more protocols provide liquidity mining, funds will flow to where the returns are the most lucrative, maximizing the utilization of assets across different protocols. At the beginning, the balance of risk and return was reached within the protocol, and finally, the balance between different DeFi protocols was reached. In the end there will be an equilibrium with the outside world.
Risks of Liquidity Mining
Siphon external funds
Of course, what is more important is not the competition between DeFi protocols, but the siphoning of funds from outside the ecology, such as CEX, institutional funds, etc. It’s still small, but it’s happening, and it’s accelerating.
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