Thinking about the MDEX incident: Three reasons for the slump in prices, mining "resistance" emerges

According to the "Risk Warning on Preventing Illegal Fund Raising in the Name of "Virtual Currency" and "Blockchain"" issued by the China Banking and Insurance Regulatory Commission and other five departments, readers are requested to abide by the laws and regulations of their region. The content of this article does not endorse the promotion of any business or investment activities. Investors are requested to raise their awareness of risk prevention. Wu said that the content of the blockchain is not allowed to be reproduced or copied without permission, and violators will be held accountable.

Wu Shuo Author | Wu Zhuocheng

Editor of this issue | Colin Wu

On the 19th, MDEX caused a stir, mainly because investors who entered the market at a high point were angry because of losses. Early rumors outside the outside world were that MDEX was founded by Huang Han, a partner of Wangong Capital (unconfirmed), but the 19th storm also revealed that Liu Jingchao, the founder of the former Bijiu.com, and Zhou Shuoji of FBG were investors. As for whether Huobi.com and Du Jun have invested in it, it is currently unknown. The outside world is more inclined to believe that Huobi does not have control, otherwise it would not have turned to BSC later.

To be fair, the price of MDX is indeed not satisfactory, falling 76% in the past 6 months and 3% in the past 30 days. In comparison, CAKE has risen 18% in the past 6 months and 84% in the past 30 days; UNI has risen 38% in the past 6 months and 80% in the past 3 months; SUSHI has fallen 4% in the past 6 months and 114% in the past 30 days. This shows that in the three months after the big fluctuations after 519, DEX TOKEN has basically returned to the level of 519, but MDEX still has a 76% drop, which is also the core reason for investors' complaints.

Why are MDEX prices sluggish?

The first reason: the total locked amount continues to decline.

At present, the total volume of MDEX in HECO and BSC is $1.86 billion, and the trading volume is $740 million. Compared with the data on March 17, the TVL was $2.28 billion and the daily trading volume was $2.2 billion; and the data on April 12, the TVL was $4.77 billion and the daily trading volume was $2.24 billion, both of which have shrunk significantly.

Although the total locked volume of DeFi has shrunk significantly after 519, the decline of MDEX is far greater than that of other mainstream DEXs. Especially since July, the TVL of most mainstream DEXs has increased significantly. As of August 20, the total locked volume has approached the previous high of 150 billion, but MDEX has not seen a rebound.

Among them, UNI's previous high was 9.33 billion, and it is currently 5.11 billion; SUSHI's previous high was 5.42 billion, and it is currently 4.52 billion; PANCKE's previous high was 7.8 billion, and it is currently 5.83 billion. Except for UNI, the TVL of other mainstream DEXs has recovered to more than 75% of the highest point. Considering the prosperity of the UNI ecosystem, which includes a large number of altcoins, it is understandable that the bubble burst during the bear market caused the TVL to drop sharply.

DeFi projects do not have a high threshold in terms of professionalism, and the most critical data is TVL. If TVL drops, then the depth will drop, the transaction volume will also drop, and then the handling fee will drop. The mining method of mdex is a combination of liquidity mining and transaction mining, so the handling fee rebate is an important source of income for miners. The decline in this income will cause miners to flee, so TVL will drop further, further causing a decline in transaction volume and handling fees, and eventually entering a vicious cycle, and the coin price will fall again and again.

The second reason: the inflation rate cannot be reduced. Each Heco chain block produces 80 MDX rewards, which are halved every six months. Theoretically, the third halving will be completed in the second half of 2022, and the subsequent increase will be very slow. Similar to Bitcoin, the issuance will stabilize after three halvings. Therefore, although the MDX plan is to issue a total of 1 billion pieces, the actual upper limit in the short term is about 700 million.

Compared with other DEXs, MDEX has the most serious mining and selling problems. SBF, the founder of the giant whale FTX, also entered the mining market with huge funds. This is also determined by the model of MDEX.

After the halving on June 5, the MDX generated by each block should have been reduced by 40, but after the cross-chain was realized, the BSC chain could also generate 40 MDX per block, so the halving effect could not be reflected. Perhaps it was for this reason that MDEX decided to advance the second halving, which would start in early September. However, such an arbitrary early halving also made more people criticize MDEX for not being decentralized enough.

The number of holding addresses is 240,675, and the growth rate of new users is about 20%. Although it has been rising steadily, it is still somewhat behind SUSHI and PANCAKE with the same lock-up volume. Addresses holding more than 1 million account for 97% of the total. With this holding ratio, it is actually very easy for big players to pull the market. There is no movement now, and perhaps they need to wait until the halving again before they can take action.

The third reason: ecology and consensus. It is undeniable that although MDEX crosses the chain to BSC, the core is still the HECO ecology. With OKEXCHAIN ​​dividing the traffic and Huobi restricting itself, HECO is naturally not in a good situation. Compared with the Ethereum ecology represented by UNI and SUSHI and the BSC ecology of PANCAKE (PANCAKE is built by Binance, so it cannot compete with it by switching to BSC), the real demand and user range of MDEX and HECO are insufficient, too concentrated in the Chinese world, and the ecology is in a weak position.

Regarding the controversial issue of handling fees, UNI's incentive model includes a handling fee dividend, that is, 0.3% of the transaction fee (ETH settlement), which will be fully distributed to liquidity providers. SUSHI has made some modifications, and its transaction fee is also 0.3%, but this part of the fee is split into two incentives, of which 0.25% is directly allocated to liquidity providers, and the remaining 0.05% is converted into SUSHI and distributed to SUSHI pledgers. This means that SushiSwap will use part of the handling fee income to repurchase SUSHI, which provides purchasing power for SUSHI.

MDEX also has a fee dividend, and the transaction fee is also 0.3%. 0.14% is used to reward mining users, and 0.06% is used to repurchase and destroy MDX, which provides buying support similar to SUSHI. However, another 0.1% is claimed to be used to promote the development of ecological projects, which cannot be directly withdrawn in the economic model. The community claims that the MDEX development team has a net income of more than 10 million US dollars per day, which may be exaggerated, but if 0.1% of the fee is all attributed to the team's income, then during the peak period when the daily transaction volume on the chain exceeds 2 billion US dollars, the team's daily income is at least 2 million US dollars.

Summary: As we pointed out in our April article:

“MDEX’s economic model has a strong ‘positive feedback’ effect. In the early stages of the project’s development, with the support of the HECO ecosystem, the price of MDX rose, which led to an increase in the income from liquidity mining, attracting a large number of LPs to provide liquidity. The transaction mining mechanism also attracted arbitrageurs to participate in transactions, and high TVL and high fee reserves further raised prices.

However, as the number of tokens in circulation continues to increase, the proportion of transaction mining fees allocated to units will become lower and lower, which will cause the price of MDX to gradually decline. The decline in the price of MDX will in turn trigger a decline in TVL and transaction mining transaction volume, thereby causing the price of MDX to further decline.

In addition, in the current (April) economic model, 100% of MDEX's transaction fees are fed back to the ecosystem. MDEX can actively select high-quality project parties and provide liquidity incentives for their tokens, but in the long run, this way of distributing transaction fees may be problematic.

First, for LPs, providing liquidity does not earn fees, especially for LPs who provide liquidity for the second pool of new projects. In the early stages of development, the second pool has more frequent transactions and the fee income is often higher. Failure to obtain fee income will lead to a decrease in LPs' enthusiasm for providing liquidity. Second, the number of MDX issued will continue to decline over time, and the incentives from MDX tokens will decline. If LPs want to continue to provide liquidity on it, they may eventually have to rely on fees. It is speculated that MDEX may gradually modify the way fees are distributed in the later stages.

Judging from the experience of liquidity mining such as FCoin, if the ecological construction cannot be completed, then early liquidity mining will become 'resistant' or even toxic. "

From this perspective, the price of MDX follows a certain pattern of inevitable decline. Those who blindly take over or "trick people into taking over" do lack basic judgment (or have bad intentions).

Reference: The first DEX in the Chinese region? What are the hidden dangers of MDEX, which is rare across Huobi and Binance?

Welcome to read Wu's selected reports: Huobi exclusive report, Binance exclusive report, Bitmain series, supervision and card freezing series, Filecoin series, currency circle chaos exposure, mining farm supervision dynamics, etc.