Three possibilities after the suspension of Uniswap liquidity mining

According to the original plan, at 8:00 am Beijing time on November 17, the leading decentralized exchange Uniswap will end its initial liquidity mining plan, which may cause the loss of some Uniswap liquidity funds. It is reported that as of now, the crypto assets locked in the Uniswap protocol have reached 3.18 billion US dollars.

As for whether Uniswap will restart mining after the suspension of liquidity mining activities, and whether there are other possibilities, the author Vault Research conducted some analysis. He believes that the possibility of Uniswap restarting liquidity mining is not high at present.

Here is the translation:

Will UNI liquidity mining continue?

I don't think so.

On November 17, the initial mining activity of Uniswap's governance token UNI will end. Some project communities (SNX, YFI, etc.) have tried to enter the UNI mining list through governance, but no project has succeeded so far, and every governance proposal has failed. This is because the project has set a high number of required participants and a low participation rate in governance. Therefore, UNI mining will stop until a new mining proposal is passed.

Therefore, the future of UNI is in the hands of the community. What does the community think? Let’s take a guess.

From the perspective of governance participation, the community refers to the UNI token holders, so what do they want? Of course, the price of the coin will rise.

So, will token holders want to resume liquidity mining? I don’t think so .

Why do liquidity mining?

A few days ago, there was an unofficial UNI community meeting, which didn’t seem to be very successful based on tweets from some of the participants (@AutismCapital and @0xMaki). But luckily, just before the meeting ended, Robert Leshner got involved and proposed maintaining liquidity mining for ETH/USDC and ETH/WBTC trading pairs while Gauntlet was doing analysis related to the rewards program.

What about voting?

Basic question: Why do liquidity mining?

1. Acquire users for your product;

2. Collect liquidity, thereby increasing the “tradability” of tokens;

3. Distribute tokens;

I think these are the three core reasons for liquidity mining. Let’s look at them one by one.

1. Get users for your product

1. Uniswap is currently the most popular DEX, and we have reason to expect it to continue to have this leading advantage;

2. One possible threat to Uniswap is that as its tradability decreases, its liquidity will shift to competitors. However, due to the huge advantages Uniswap currently has, this threat does not seem to be that great, at least for a while;

3. We will be able to see this result after mining is completed;

2. Collect liquidity to improve the “tradability” of tokens

1. UNI liquidity mining does not have a 2-pool plan like ETH/UNI. Therefore, the initial plan is to collect liquidity for Uniswap;

2. UNI tokens have sufficient liquidity without mining rewards, and many large CEXs have listed the tokens, so from the perspective of tradability, the UNI community does not have enough motivation to open a second pool. In addition, the cryptocurrency community has a very bad impression of the second pool, so opening a second pool is not a very suitable choice;

3. No 2 pool, which means we are back to square one;

“Increasing liquidity just means price discovery can be faster and more accurate. If your project is shit, increasing liquidity will only help it go to zero faster. If your project is good, then the token’s temporary lack of liquidity is fine.”

3. Distribute tokens

1. Many early projects have difficulty distributing tokens and establishing initial liquidity. One way to solve this problem is liquidity mining.

2. But since every Uniswap user initially gets 400 UNI tokens, UNI has no initial supply/liquidity issues;

3. I think the 400 UNI per user distribution is a good idea. Distributing more tokens can reduce the price, so if we are going to influence the price, it is better to do it in the early stages from a price perspective + a psychological safety perspective for product builders (which is very important);

None of these three reasons are suitable for the current Uniswap, so UNI does not need liquidity mining. If liquidity mining is carried out, it will be to promote the Uniswap exchange.

Ironically, promoting Uniswap won’t be that important to the average UNI holder in the near future because Uniswap is currently successful.

And promoting Uniswap is quite important to the Uniswap team and VC firms, and fortunately, they own a lot of tokens, as I wrote in the past. So when an emergency occurs, the Uniswap team and VC firms will participate in the vote. There may be some legal issues here, but the Uniswap team recently hired a chief legal officer, so they will find a way to mitigate the legal issues.

Summarize

1. UNI token holders (except the team and VC) have no reason to vote to resume liquidity mining, as this may cause the price of the coin to fall;

2. If there is ever a reason to recover in the future, it would be when a competitor drains Uniswap’s liquidity, as we saw with Sushiswap at the time;

3. Liquidity mining will only resume if the team/VC or someone who supports their vision participates in the vote;

Possible scenarios: Bold and ideal situations

A bold assumption is: burn the remaining UNI.

What are the chances of this happening? Token holders want short-term profits, and once this proposal is put forward, these token holders who expect short-term benefits are likely to vote. Of course, the team and VCs are likely to oppose it, but if they remain silent like they are now, this may happen.

Another possibility is to continue to retain liquidity mining for ETH/USDC and ETH/WBTC trading pairs.

The longer term ideal would be to announce another use case for UNI on the protocol layer and tie rewards to that. This could happen when Uniswap v3 is released, and I’m assuming the team is trying to find that solution.

Let’s see how UNI will develop.