A quick overview of new solutions for DeFi liquidity: Fei, Ondo Finance, OlympusDAO and Tokemak
Liquidity is one of the primary goals of any developed financial market. The question is essentially, "I want to make transaction X as cheap as possible, and I need someone on the other side." This applies not only to swapping tokens, but also to lending, derivatives, and structured products.
Liquidity is especially important for young DeFi projects. As they grow, they want new users and stakers to come in through the marketplace.
This article shows how DeFi has solved this liquidity problem in the past, and how projects such as Fei, Ondo Finance, OlympusDAO, and Tokemak are solving this problem in the next wave of DeFi.
Liquidity mining and "locust" capital
When Compound started issuing COMP tokens to suppliers and borrowers in its lending marketplace, it was a big catalyst for DeFi. This is the first "liquidity mining" - exchanging project ownership for temporary liquidity.
The problem is that yield mining is expensive and expensive.
From the perspective of consumers, "yield farming" is the optimal strategy to transfer capital to the place with the highest return in the return of liquidity mining. This creates a tendency for capital to leave once the returns dry up, in addition to the constant tossing of project tokens into the market once acquired, with a slow bleeding effect. Competition, as we know, is good for consumers and hard for businesses (protocols). It also encourages innovation, which we will see later in this article.
Even with such high costs, bootstrapping a user base has never been easier. Simply launching a token and giving away 10-50% of it can suddenly have tens or hundreds of millions of TVL. The summer of DeFi in 2020 is the climax of this wave, and innovations such as pool 2 mining have led to a big explosion of new projects.
These numbers are unsustainable. Both projects and investors are increasingly aware of the dangers of liquidity mining to the long-term development of projects and are looking for solutions.
A New Approach to Liquidity
Solving these “locust” capital problems is part of the next wave of DeFi growth, recently dubbed DeFi 2.0. These new protocols will emerge at higher layers of the DeFi stack. They can use the scale and network effects of the base layer DeFi protocol to solve liquidity problems and achieve greater market efficiency.
Projects don't have to pay high prices for "locust" liquidity, they can choose the following two ways:
Buy their liquidity directly
Rent from the protocol that provides the cheapest, highest quality liquidity
The former approach we call protocol-owned liquidity (or similarly, protocol-controlled value or protocol-controlled assets). For example, Fei Protocol, OlympusDAO, and Frax Finance are all PCV-driven, so their tokens are extremely liquid per TVL.
The latter method of renting liquidity, we will call Liquidity as a Service (LaaS). LaaS can be very efficient when offered by protocols that specialize in this service, such as Fei and Tokemak.
Note: There are many ways to solve the "locust" funding problem, including options and lock-ups. This post only focuses on a few methods of popular items
Own protocol liquidity through OlympusPro
OlympusPro provides an opportunity for projects to bring liquidity to their protocol by utilizing the OlympusDAO bond mechanism. Projects can exchange their tokens for any type of LP token or underlying underlying asset at a discounted rate. This is a huge improvement over traditional liquidity mining projects, where projects cannot maintain any "locust" liquidity.
The underlying tokens in OlympusPro bonds do not need to have any relationship to OHM tokens, but projects can be paired with OHM or sOHM to gain exposure to the OlympusDAO ecosystem.
OlympusPro subverts the reward cost of liquidity mining and shifts the protocol burden to a more sustainable protocol with liquidity. Here, the protocol can use native tokens to obtain liquidity permanently without fear of loss. Traditionally, yield mining has represented equally high upfront costs with no rewards.
Projects that want liquidity but don’t need to own it outright can explore other ways to lease it other than traditional liquidity mining projects like Tokemak and Fei.
Tokemak's Sustainable Liquidity
Tokemak proposes an approach to liquidity as a service. Tokemak allows projects to supply a single token to a reactor, which is then paired with an underlying asset such as ETH, USDC or (possibly in the future) FEI in a liquidity pool. TOKE holders direct these liquidity to places that need it most and make up for any impermanent losses incurred by the project.
This impermanence loss insurance is very beneficial to depositors. Tokemak accumulates assets for itself through transaction fees. This ultimately enhances its ability to provide sustainable liquidity. Initially, TOKE is issued as a reward to users, and TOKE holders ultimately have ownership of the Tokemak Protocol Controlled Assets (PCA).
TOKE token economics encourages long-term value-oriented network participation. By obtaining a share of TOKE, projects can direct their liquidity to wherever they need. This is an upfront investment, but much better than traditional yield farming.
Projects seeking long-term sustainable liquidity would ideally acquire TOKE shares and plant the seeds for the Tokemak reactor. They can use TOKE to pair their project tokens in any supported liquid market of their choice without risk of impermanent loss.
Liquidity as a Service (LaaS) via Fei and Ondo
The Fei Protocol supports FEI, a fully decentralized and scalable stablecoin backed by on-chain reserves. Fei can use its PCV to support liquidity provision denominated in FEI-based pairs.
Fei Protocol is partnering with Ondo Finance to provide cost-effective and flexible term liquidity services. Essentially, projects can deposit their project tokens into an Ondo liquidity pool with flexible maturities, and the Fei protocol will match their deposits with an equivalent amount of newly minted FEI, forming a liquidity pair. Tokens are paired in AMMs like Uniswap or SushiSwap.
Fei Protocol basically doubles the liquidity provided by the project and eliminates all upfront capital costs. At the end of the vault window, the vault returns FEI to the FEI Protocol, plus a small flat fee, and returns all remaining tokens to the project.
Ondo Vault does all the accounting behind the scenes, and the rest of the project is all transaction fees and all impermanent losses.
Summarize
Summarize
Projects can now choose to invest in owned liquidity through the OlympusPro protocol, invest in long-term value-pegged liquidity through Tokemak, or invest in cost-effective liquidity services through Fei and Ondo.
This article comes from the decentralized financial community and is reproduced with authorization.
Source：https://medium.com/fei-protocol/new-approaches-to-liquidity-in-defi-624f2e50937b
This article comes from the decentralized financial community and is reproduced with authorization.
