DeFi: Tips for Liquidity Mining “DeGen”

Most mining is done by dedicated “DeGens” who chase opportunities with short windows of 5,000% or even 10,000% annualized returns, and then quickly switch projects once returns decline.

Author: Dr. Omer Ozden

Source | Liandede

Thousands of years ago, people began farming in different geographical regions and historical periods around the world. As agricultural civilizations developed in these places, social, economic and cultural activities also developed.

These different aspects of human society are stacked and intertwined like Lego to form our "civilization".

This summer, I wrote an article about how the arrival of DeFi will lead to the digitization of Wall Street, and I also mentioned that the development of DeFi is mainly driven by liquidity mining.

The rise of liquidity mining has increased the total locked value (TVL) of DeFi from about $1 billion in June to $10 billion today. Until recently, most people who hold cryptocurrencies just kept their assets in their wallets waiting for appreciation. But now, some tokens can already bring cash flow to holders, and some provide certain governance rights.

In addition, new DeFi products and applications are constantly being launched and built like Lego on the DeFi ecosystem. One of the most important driving forces at the bottom layer is liquidity mining, just like agriculture thousands of years ago laid the foundation for the development of world civilization.

Earlier this year, we established a liquidity mining fund in New York. Most of its members are young mathematicians, programmers and hedge fund traders from Wall Street. Our goal is to obtain the highest liquidity mining returns while controlling risks.

Our team has been in front of the computer all the time, giving up all social activities (even girlfriends), because their mission is to carry out liquidity mining day and night. They are called "DeGen" (degenerate) in North America. This word combines the prefix of Defi and the word Degenerate, indicating that they are addicted to a world that ordinary people will not enter.

The longer a "DeGen" spends on due diligence on a project, the smaller the return will be, so the "DeGen" who can enter the market earliest and conduct sufficient background checks to reduce risks can obtain the highest return.

When we conduct liquidity mining, we need to make quick decisions on the following aspects:

(1) The reliability and capability of the project team;

(2) Whether the administrator's private key is destroyed;

(3) Whether the code has passed the audit;

(4) When to "rebase" (reset/change base);

(5) Is there a “Rug Pull” risk? For example, is there a possibility that the founder will abandon the project and run away with the funds?

Many of the highest-yielding projects are launched by anonymous teams, which requires a more in-depth evaluation of the projects.

Therefore, liquidity mining is not suitable for ordinary users. Liquidity mining is risky, so most of the mining is done by fully committed "DeGen" (degenerates), who chase opportunities with short windows of 5000% or even 10000% annualized returns, and then quickly switch projects once the returns drop.

Liquidity mining strategies to increase returns are also constantly being updated. For example, using a preset “flash loan” program on a decentralized exchange (DEX) such as dYdX written in Solidity, or applying the algorithm “Folding” to increase returns.

These constantly updated mining techniques bring explosive returns to “DeGen” (degenerates) and liquidity miners.

Also, you may have noticed that there are a lot of new trendy and food-named projects like $PASTA, $SUSHI, $BURGER, $KIMCHI and the recent $YAM.3s.

In the future, there will be many new platforms that "DeGen" will use, such as yAxis, which provides a fund pool similar to $YFI, puts gas fees into a pool, and allows users to share the added value in the fund pool and participate in project governance through $YAX tokens.

However, some of the foods mentioned above are "toxic", whether due to the risk of running away or due to loopholes in smart contracts.

In August, $YAM.1s was constantly rebased due to a vulnerability in the code. Fortunately, the YAM team was responsible at the time and migrated the old YAMs to the new YAMs based on the updated (and audited) code.

So due diligence is important, and you should find out the answers to the questions I listed above before investing.

Another risk of liquidity mining is impermanent loss. You must understand this concept because many people are using UNISWAP and similar automated market makers, but they don’t know that when you provide liquidity to automated market makers, you are actually taking a greater risk of depreciation than simply holding coins.

The greater the price volatility, the higher the risk of impermanent loss. This means that sometimes the benefits of participating in liquidity mining may not be as good as holding coins, which is also the result that many users realized after participating in liquidity mining.

But the reason we call it “impermanent” is that as long as the relative price in the automated market maker system returns to the price when you participated in liquidity mining, the loss disappears, and you can also get 100% of the allocated transaction fees, as well as other possible benefits based on your strategy.

The risk of impermanent loss is the main reason why liquidity mining has not been widely used among ordinary users and large institutions.

Some projects are designed with how to avoid impermanent risk in mind, such as LINKSWAP and its token $YFL, which provide $LINK holders with more trading pairs and liquidity, while setting up protection mechanisms against impermanent losses.

We know that $LINK holders are mostly long-term holders because they don’t want to bear any impermanent losses. There are other projects, such as THORChain, a decentralized cross-chain liquidity provider without a wrapped token, and Bancor V2, which reduces impermanent losses by pegging liquidity reserves, which can make the relative value of the automated market maker token pool more stable.

As more and more people from both the blockchain and traditional finance worlds (now earning almost 0%) start to enter the field of liquidity mining, it is important to keep up with the latest strategies, the latest projects, and understand the risks and ways to reduce them. Many of the situations I described above are for those who are willing to use more aggressive strategies (for higher returns, but also face higher risks) and "DeGens" (degenerates) who spend a lot of time on liquidity mining every day.

But these concepts are also important for ordinary users, such as those who are learning about liquidity mining and are willing to accept lower liquidity mining returns while taking less risk.

As liquidity mining brings more total locked value to Defi (a 10-fold increase in the past 4 months), you will find that liquidity mining strategies are becoming more and more diversified, and there are more and more related Defi products and applications, just like Lego made of money.

In the early days of liquidity mining, more Defi products will develop around liquidity mining, just like our civilization, whether in terms of economy, culture or society, began to develop around agriculture thousands of years ago.