Liquidity Mining Will Be the Future of Capital Markets

Ishan Pandey: Hi JD, welcome to our series “Behind the Startup.” Please tell us about yourself and the story behind BENQI?

JD Gagnon: Thanks Ishan, it’s a pleasure to be here. There are 7 of us on the core team for BENQI, all from various backgrounds both in business and technology. Personally, I have been an active participant in the crypto space since 2016 and have supported many startups and projects in the space. Before this, I was a partner with a tradfi institution, owned and managed a North American technology brand and marketing firm, and have spent much time in PE and resources trade; a lot of interesting endeavours over the years. I was initially drawn to the blockchain space as I strongly believed that it would be a paradigm shift for the way we participate in personal and corporate finance globally. Obviously, it has taken some time for the technologies to evolve to a place where scalability and consensus mechanisms matured enough to make a meaningful endeavour in this regard possible.

Ishan Pandey: How does decentralised non-custodial liquidity market protocol built with liquidity pools work? Please tell us a little bit about how the liquidity market protocol works?

JD Gagnon: People in DEXs must supply liquidity to facilitate trade on decentralised platforms through matching engines. Users put their own money on the site in exchange for a percentage of the fees for providing liquidity. Only trade pairs are allowed to be placed here, implying that the pool is always filled with two distinct cryptocurrencies.

As a result, each trading pair has its smart contract or pool. Users can send their token A to the trading address and receive their chosen token B at the preset exchange rate in return. This procedure is subject to a nominal price. This charge also serves as a financial incentive for capital deposits. For each trade, liquidity providers are paid a proportion of the trading fees. As a result, through liquidity mining, they may generate a passive income.

Many networks also provide additional incentives in the form of coins. As a result of using the service, backers gain additional coins that may be freely exchanged on the market. These frequently come with a number of benefits, such as the ability to vote on future growth. Additional earnings may be made if the price of the tokens were to rise.

People must supply liquidity to facilitate trade on decentralised platforms. Users can put their own money on the site in exchange for a percentage of the fees. Only trade pairs are allowed to be placed here, which implies that the pool is always filled with two distinct cryptocurrencies.

As a result, each trading pair has its smart contract or pool. Users can send their token A to the trading address and receive their chosen token B at the preset exchange rate in return. This procedure is subject to a minor price.

This charge also serves as a financial incentive for capital deposits. For each trade, liquidity providers are paid a proportion of the trading fees. As a result, through liquidity mining, they may generate a passive income.

Many networks also provide additional incentives in the form of coins. As a result of using the service, backers gain additional coins that may be freely exchanged on the market. These frequently come with a number of benefits, such as the ability to vote on future growth. Additional earnings may be made if the price of the tokens were to rise. Additional token pools will be added as the platform grows. The additions to the protocol will be initially decided by the core team. As the protocol’s governance transitions into a Decentralized Autonomous Organization (DAO), additional pools are approved based on community votes and proposals, using the QI governance token.

Users interact with the smart contracts directly where Depositors/Lenders will be given tokenised yield-bearing tokens used to withdraw funds from the pool on-demand when required.

Ishan Pandey: Recently, Elon Musk announced that Tesla would no longer accept Bitcoins as payment for their vehicles leading to a massive dip in the current price rally. What do you think has led to this sudden announcement and what will be its impact on the crypto space at large?

JD Gagnon: As I mentioned previously, I believe Elon has an incredible reach to a very large audience. This can be used in both supportive and manipulative ways. There is a lot of speculation as to the motivations behind the recent comments from Elon, and Tesla’s decisions concerning Bitcoin. I’m hardly in a position to be the arbiter of these motivations, but one can definitely conclude that the motivations were likely self-serving in nature. As mentioned, I think the realisation that one company and one person still wields such an influence over the space does nothing but hurt greater adoption.

Ishan Pandey: The industry’s growth has drawn a large amount of traffic and users to cryptocurrencies, but there is a consistent threat to data privacy with the rise of Central Bank Digital Currencies (CBDCs). What are your views on CBDCs and the argument that CBDCs will take away financial privacy from its citizens?

JD Gagnon: I have always said that I don’t believe we will see a world in the near future where things shift entirely in one direction or the other, but rather we will find a symbiotic environment where both centralised finance and decentralised finance can harmoniously coexist. However, I believe that there will be a greater degree of choice and transparency for the user globally. I don’t believe CBDCs will take away privacy any more than existing CeFi structures already do, but rather will likely increase the flexibility and ease of use of those structures. Again, I believe we will see a world where DeFi exists in parallel and can be used if desired as a contrast to centralised structures.

Ishan Pandey: According to current statistics, most decentralised finance (DeFi) transactions now occur on Ethereum, but congestion and the “gas prices” are slowing things down. How can the problem of rising transaction fees be addressed and resolved?

JD Gagnon: One of the major solutions to this problem is participating in or developing DeFi applications on high throughput Layer 1 protocols. This was one of the primary reasons that we developed the protocol on Avalanche. The Avalanche blockchain has sub-second finality, low fees and is highly scalable. This is a massive advantage for the initial iteration of our protocol that will run on the Avalanche EVM (C-chain). Contract interactions in this environment will generally cost fractions of a dollar to complete and make the use of protocol relatively attractive to our ETH counterparts, especially for the average portfolio value participant. One of our primary goals with protocol is to open up the proper and structured use of DeFi structures to all participants in the space, whereas fees are not prohibitively high.

Ishan Pandey: Can you explain how liquidity mining works? What will be your tip for new beginners who recently ventured into the crypto trading space on how to use liquidity pools?

JD Gagnon: Liquidity mining is a structure that emits tokens that act as an incentive for users to participate in activities desired by the protocol for efficient operation. In our case, lending, borrowing, and providing liquidity on the decentralised exchange (LP). We have made liquidity mining very simple on the protocol and lenders and borrowers will automatically earn token emissions for their activities according to the LM rates of the protocol. The LP tokens will also have a home for liquidity mining on the platform and will require a deposit into the contract to earn rewards.

For newer participants in the space, the liquidity mining rewards benefit from using different platforms. In addition to the normal yields and costs of the platforms, liquidity mining is structured as concurrent incentivisation to the normal protocol activities.

Ishan Pandey: What are your views on the Elon Musk controversy. Do you think that he is manipulating the market and that he should sell the Bitcoin that Tesla is holding on its balance sheet?

JD Gagnon: Truthfully, I’m impartial to the Elon Musk situation. I think in many ways, he brings attention (positive) to the space that not many other public figures could conjure. In recent times though, we have seen how this influence can be used in ways that are, in my opinion, detrimental to the space. Unfortunately, many people have lost a lot of money due to one man’s actions, but many have also made a lot. I think the most unfortunate consequence of his recent influence is the realisation that the space is still susceptible to a great deal of manipulation on the part of a core group of individuals, which in many ways keeps legitimacy out of reach to a certain extent. Over time, I believe this influence will continue to erode as market participation increases and certain types of regulation are introduced.

Ishan Pandey: Decentralised liquidity market protocols eliminate human and institutional intermediaries, replacing them with smart contracts. What, according to you, are the benefits of this? How do liquidity market protocols work? (technical explanation)

JD Gagnon: Decentralised liquidity markets aims to provide users with a permissionless alternative to human and institutional liquidity markets. By being permissionless, users can:

1. Instantly supply to and withdraw liquidity from a shared liquidity market
2. Instantly borrow from a liquidity market using their supplied assets as collateral
3. Have a live and transparent view of interest rates around the clock based on the asset’s market supply and demand

All this can be done with a few clicks of the button as smart contracts administer the protocol instead of humans. Smart contracts govern the protocol parameters such as lending and borrowing rates, liquidation thresholds and loan-to-value ratios.

As smart contracts determine this in real-time around the clock, there’s no requirement for active human resources to observe, govern and administer any sort of action within the markets. This, in return, eliminates points of friction such as human resource capital and human error. As a result, decentralised liquidity markets operate much more efficiently and significantly reduce friction for both the lender and borrower utilising the protocol.

The purpose of this article is to remove informational asymmetry existing today in our digital markets by performing due diligence by asking the right questions and equipping readers with better opinions to make informed decisions. The material does not constitute any investment, financial, or legal advice. Please do your research before investing in any digital assets or tokens, etc. The writer does not have any vested interest in the company. Ishan Pandey.