Review of the DeFi liquidity mining boom: DEX has no moat

The result is that DEX will face incentive competition on both the asset side and the user side. It will be difficult for DEX to build a moat, and the competition will be extremely fierce.

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1. Liquidity mining frenzy

Compound 

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Source: Compound.finance

And this is contrary to the purpose of providing a better experience and reducing the cost of use through liquidity mining. Therefore, Compound canceled loan mining and retained liquidity mining in the later stage. This is undoubtedly a correct decision.

At the same time, the price of Compound tokens has risen rapidly, and the ultra-high mining returns have ignited the enthusiasm for mining in the market.

Balancer 

In fact, Balancer's liquidity mining started earlier, but the token distribution was later than Compound. Although there is a good model of Compound, the price trend of BAL has not been able to replicate COMP. First, Balancer has only appeared for a short time and has not formed a strong consensus, and the industry status and data volume are far behind Compound.

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Source: coingecko.com

Balancer is the first DEX to start mining. After the start of mining, the data volume has been rising all the way. At present, it is basically stable in the top five DEX rankings, which is a very good result. In fact, before Curve started liquidity mining, Balancer has always been the preferred main battlefield for mining.

After that, a bunch of projects have started or plan to start liquidity mining plans, but Curve is the highlight.

Curve 

Curve itself is the second-ranked star product in the DEX field, with a huge trading volume, and its token issuance plan has also received unanimous expectations from the market. The three major exchanges led by Binance all launched CRV tokens immediately.

Source: debank.com

Source: debank.com

How high can Curve mining income be? For example, YFI issued the ETH packaging product YETH. The principle is to take ETH to MakerDAO to mortgage DAI, and then use DAI to Curve mining. The annualized income can reach as high as 100% . Therefore, it is not wrong to say that CRV supports the high yield rate of the mining market.

The above are all orthodox liquidity mining, and they are mining mature projects. Although the rate of return is relatively high, it is not to an outrageous level. With the birth of YFI, YAM and SushiSwap, it completely detonated the liquidity mining market.

YFI

YFI is a platform aggregation protocol with automatic position adjustment function, and it is an important role in this round of liquidity mining. It pioneered the use of a Bitcoin-like token distribution model in DeFi, no private placement, no pre-mining, no team share, and an extremely fair token distribution model, which suddenly ignited the community's desire for fairness. For VCs, etc. The dissatisfaction with obtaining Token at an ultra-low price has been sought after by the DeFi community.

YFI has allowed the industry to witness the birth of 10,000 times currency, and the miracle that it only takes more than 40 days to go from 0 to 800 million US dollars in market value. The DeFi community's recognition of the YFI model is evident.

YFI's pioneering model has achieved great success, and then projects using the YFI model to distribute tokens followed one after another, among which YAM came the fastest.

YAM 

YAM uses YFI's token distribution model, and at the same time adds AMPL's flexible supply mechanism on the basis of YFI. The currency price is anchored at $1. When the price is above $1, additional tokens will be issued to adjust the price.

Due to the huge benchmarking effect of YFI, YAM has gained great attention, and YAM's pioneering liquidity mining model has led to a greater mining frenzy.

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Source: https://www.panewslab.com/zh/articledetails/D61950915.html

Then came the emergence of SushiSwap, which rewritten the conventional routine of liquidity mining. Based on the YFI token distribution mechanism and the YAM mining mechanism, it focused on Uniswap's liquidity pool.

SushiSwap 

SushiSwap is a fork from Uniswap. If you want to mine SUSHI (sushi) tokens, you need to provide market making for specific trading pairs on Uniswap, and then mortgage the LP token obtained from the market making to SushiSwap.image description

Source: sushiswap.org

This is an extremely terrifying attack on Uniswap, using the high returns generated by liquidity mining to tell an imaginative story, and this story will be able to provide support for the price and attract more funds to lock in.

Source: debank.com

Source: debank.com

However, SushiSwap mining has a super high rate of return and does not require any development at all, making everyone feel that they have discovered a gold mine. After SushiSwap, countless imitation disks were born.

Grapes, ham, pasta, shrimp, sushi, kimchi, ramen, etc. all appeared one after another, and imitation dishes such as pearls, carrots, salmon, diamonds, and corals also appeared on TRON and grapefruit outside of Ethereum. At the same time, small ants, GXChain and other ecosystems also have actions to start liquidity mining.

The tide of mining for the whole people has followed the trend.

Most of these imitation disks have not been audited when they go online, but there are still a lot of funds rushing into the mines, and of course many people have made money.

And here is a key question, everyone knows that the token has no value, who will buy it? Of course, it can only be investors in the secondary market who think that the price of tokens will rise and want to make a fortune.

With the recent decline in the broader market, these worthless carrots, salmon, etc. have ushered in a greater decline, and those who bought in the secondary market suffered heavy losses.

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2. The essence of liquidity mining

We can see that liquidity mining has changed from initially encouraging users to provide liquidity and providing users with a better user experience, to YFI becoming a better token distribution method. As an aggregate financial management platform, YFI can still capture of value.

When it comes to YAM and subsequent imitation disks, its tokens have no value other than the governance value, and if the influence is not large enough, the governance value is basically equal to zero, and its essence is to distribute for distribution. market speculation.

Except that SUSHI has a good story, there is no other story. It is essentially the pursuit of income by funds, and in the process of pursuit, it can even ignore risks.

Therefore, the essence of liquidity mining is the desire of funds for yield.

In the DeFi world, funds can flow freely and dolls can be nested continuously. After layers of nesting, one fund can obtain multiple benefits. Based on composability, funds have no loyalty, and will flow wherever the income is high.

In such a situation, competition for liquidity will be the norm, and funds will always be scarce. Once someone can provide a rate of return higher than the average level and the risk is controllable, funds will quickly accumulate, and funds from other platforms will quickly drain. (However, because of the high gas fee of Ethereum, it has slowed down the loss of funds).

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3. Where does DEX go from here?

In the liquidity mining frenzy, we have seen the extreme desire of DEX for liquidity, and SushiSwap has opened up another dimension of the DEX liquidity war.

If the previous liquidity competition among DEXs was in the era of cold weapons, SushiSwap directly pushed the war into the era of hot weapons, and the degree of tragedy cannot be compared in the same breath.

And because this model is not an exclusive patent of SushiSwap, latecomers can do this, and even Uniswap's counterattack can be carried out on SushiSwap in the same way.

Here we can find that the current DEX really has no moat, and the industry advantages that have been built up over the years may be completely taken away within a few days. Even if Uniswap issued tokens, it was nothing more than the rate of return, and it still couldn't get rid of the situation of hand-to-hand combat.

This will cause DEX to spend a lot of energy fighting for liquidity, because it may be subverted at any time, which will force DEX to develop and iterate rapidly. But because it can be easily reused, no amount of innovation can escape the fate of being forked. At this point, the application may be forced to no longer open fork authorization. This will be a blow to the open spirit of DeFi.

Here I can better understand the beauty of 1inch. No matter where the liquidity is, I can provide the best liquidity, and there is no need to fight for the liquidity.

The follow-up development of DEX should focus on how to find a balance between composability and moat, and this requires practitioners to work hard to explore.

Disclaimer: This article is the author's independent opinion, and does not represent the position of the Blockchain Institute (public account), nor does it constitute any investment opinion or suggestion.

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Disclaimer: This article is the author's independent opinion, and does not represent the position of the Blockchain Institute (public account), nor does it constitute any investment opinion or suggestion.