“Liquidity mining is one of the dumbest things happening right now in crypto,” says @hasufl

Back in DeFi Summer, the mania for user deposits in exchange for rewards dominated the incentive programs of most DeFi protocols. Nevertheless, the flaws of such imprecise enticement started to attract mercenary farmers instead of protocol users. It turns out that high APR numbers caused some users to overlook the evident fact that farming rewards are harvested in the form of native protocol tokens.

Masterchef.sol

The most famous contract for DeFi developers already has proven how powerful copy-pasting can be. Masterchef.sol is one of the most forked contracts in crypto GitHub. The convenience has gotten to a point that all of its functions tend to remain unchanged. Looking back in history, some will remember how this contract emerged to draw liquidity out of Uniswap back in 2020.

The Sushiwap team deployed this double-edge sword on a ferocious attempt to incentivize any assets locked up in LP token with SUSHI token emissions. A new way of token rewards emission was just born and quickly became a popular way to attract capital deposits.

Looking at the following report by Nansen, the result shows a total of 40K farm entries and exits. Did the duration between farm entries and exits kill “DeFi 1.0”? The chart below represents “farming stickiness”. This addresses the duration of tokens locked within a farm.

• 42% of yield farmers entered within the first 24hours since the pool was deployed
• 16% of farmers left within the next 48 hours
• By the third day, 70% of users will have withdrawn from the contract

Are governance tokens the “crypto-equivalent of authorized but unissued shares”?

According to Hasu and Monetsupply native tokens in DAO treasuries are the “crypto-equivalent of authorized but unissued shares.” This means that liquidity mining puts new tokens into circulation via liquidity incentives, which in return end up leading to selling pressure.

As an example, this financial statement by Messari compares the number to the amount of grant money paid out over that same period.

• The top 100 accounts accrued 69% of all COMP tokens mined
• Only 19% of COMP holders have kept an amount greater than 1% of their claimed COMP
• Only 7% of COMP holders have kept an amount greater than 50% of their rewards

Paperhand killers

Fresh deposits, bonds, time-weighted voting, and DAO-to-DAO stable coin issuers are just some of the latest advancements proving its potential to disrupt how DeFi protocols appeal fresh deposits. These strategies come in the form of a new wave that manages and directs large sums of capital via “protocol owned liquidity”.

The next iteration of “free digital money” is starting to come with DeFi 2.0. Here’s why:

• Information has become a commodity on the Internet. Its value can now be harnessed in Web3
• Liquidity management in DeFi is the equivalent of data storage in Web2, where cloud services command the services of computing and storage. Its equivalent in DeFi is “Liquidity as a service” in the form of lending, automatic market making…
• Remove the selling pressure on native governance tokens

However, just like in the traditional world, whoever controls liquidity will end up “dominating DeFi”. Whichever protocol wins the “Vampire wars” will initiate a monopoly of its own. Rotating TVL from one protocol to another can’t last for too long though. Why? Temporary farmers will take their rewards and go away.

“I think liquidity mining is one of the dumbest things happening right now in crypto,” Hasu

Let’s look at the alternatives that seek to harness liquidity via transparent payoffs. Here’s is a step-by-step roadmap of a scheme that seeks to address the concerns of liquidity mining:

Distribution strategies

• Recursive borrowing and lending is not sustainable and this practice could only be held back if one side of the market was incentivized: either lenders or borrowers. Alex Kroeger suggests incentivizing the lending side to “reduce the practice of recursive borrow/lending while still attracting this target user profile.”
• Vesting schedules that specify how many reward tokens are redeemable while retaining governance rights
• Governance mining: those who put time and effort into the protocol will be much more aligned with its success in the long term. By giving users an explicit voice in governance, the subjectivity of determining the “highest impact” contributions to be diminished and agreed upon via community multisigs.

The bribe games

• “Vote locking” in the form of voting escrows that lock tokens for prolonged periods of time in exchange for voting power. By locking a portion of their CRV rewards, individual farmers could direct even more rewards to their favorite pools and secure greater profitability in the long run. This process known as “genomics” centralizes governance via token accumulation. Whoever controls the vote-locking systems will end up controlling rewards emission.
• “The Bribening”: promise to ensure healthy liquid markets while granting transparent costs and payoffs. The Bribe ecosystem, therefore, serves as middleware to the governance layer. This allows to “bribe” vote-escrowed holders to direct liquidity to the pools that are most important under their principles. Beware of the importance of token holders versus individual farmers.
• Vote acquisition via “Market-making venomics”. Users provide funds in exchange for token rewards which can be used to vote on where liquidity will be deployed.

Protocol owned liquidity

• “Risk tranching” or impermanent loss mitigation seeks to pair native governance tokens with stablecoin pairings with liquidity pools.
• “Bonding”, protocols exchange liquidity pool positions for bonds. By doing this the protocols control the liquidity of their token
• “Olympus forks 2.0”: Once the high APY has provide a competitive-enough edge and the treasury has consolidated its token, it is no longer necessary to keep on rebasing. This next iteration aims to raise funds vis SPAC, where the treasury remains intact and keeps growing upon farming and investment revenues.

Moving forward

Liquidity as a service has already proven that it can become one of the emerging narratives for 2022. Now it is time for the users to decide whether “curve wars are dumb”, “Olympus forks are a Ponzi”, or “governance-control is centralized”…

Today, January 23, 2022, with a few hours remaining for a screenshot that seeks to solve the flaws of liquidity mining, the DeFi narrative will show the entire crypto ecosystem whether being “bullish on experimentation” can pay off the decline of the orange coin.