Review of the DeFi liquidity mining craze: DEX has no moat

The result is that DEX will face incentive competition on both the asset side and the user side. It will be difficult for DEX to build a moat and the competition will be extremely fierce.

The emergence of the liquidity mining craze has perfectly verified this assertion. Before continuing the discussion of DEX, it is necessary to review the recent liquidity mining craze.

Compound

On June 15, Compound first launched liquidity mining and lending mining. Because tokens were distributed according to the interest paid, small currencies were borrowed crazily, which in turn formed a distorted interest rate market and affected the real lending demand.

This is contrary to the purpose of providing a better experience and reducing usage costs through liquidity mining. Therefore, Compound later cancelled lending mining and retained liquidity mining, which was undoubtedly a correct decision.

At the same time, the rapid rise in the price of Compound tokens and the extremely high returns from mining have ignited the market's enthusiasm for mining.

Balancer

In fact, Balancer's liquidity mining started earlier, but the token distribution was later than Compound. Although Compound is a good example, BAL's price trend has not been able to replicate COMP. First, Balancer has only been around for a short time and has not formed a strong consensus. In addition, the industry status and data volume are far behind Compound.

Moreover, the price was not low when it was first launched, and mining had not yet become completely popular, so its price continued to fall. It was not until August when mining exploded that the price rebounded.

Source: coingecko.com

Balancer is the first DEX to start mining. After the start of mining, the data volume has been rising all the way. It is currently basically stable in the top five of the DEX rankings, which is a very good result. In fact, before Curve started liquidity mining, Balancer has always been the preferred mining battlefield.

After that, a bunch of projects started or planned to start liquidity mining programs, but Curve was the highlight.

Curve

Curve itself is the second-ranked star product in the DEX field with huge trading volume, and its coin issuance plan has also been unanimously anticipated by the market. The three major exchanges led by Binance have launched the CRV token at the first opportunity.

However, due to the huge circulation of CRV and the output of 2 million coins per day, the price of CRV has been falling. Miners firmly implement the strategy of mining, selling and withdrawing. Moreover, because its business is the exchange between stablecoins, there is no free loss in mining, so its locked-up volume has increased rapidly, and at the same time, there has been a continuous sell-off of CRV tokens in the market.

Source: debank.com

How high can the mining income of Curve be? For example, YFI issued YETH, a packaging product of ETH. The principle is to take ETH to MakerDAO to mortgage and borrow DAI, and then use DAI to mine on Curve, with an annualized income of up to 100%. So it is not wrong to say that CRV supports the high yield of the mining market.

The above are all orthodox liquidity mining, which are all mature projects. Although the yield is relatively high, it is not outrageous. With the birth of YFI, YAM and SushiSwap, the liquidity mining market has been completely detonated.

YFI

YFI is a platform aggregation protocol with an automatic position adjustment function, and plays an important role in this round of liquidity mining. It pioneered the use of a token distribution model similar to Bitcoin in DeFi, with no private placement, no pre-mining, no team share, and an extremely fair token distribution model, which immediately ignited the community's desire for fairness and dissatisfaction with VCs and others obtaining tokens at ultra-low prices, and was sought after by the DeFi community.

YFI has allowed the industry to witness the birth of a 10,000-fold coin, and the miracle of going from 0 to 800 million US dollars in market value in just over 40 days. The DeFi community's recognition of the YFI model is evident.

YFI's pioneering model has achieved great success, and projects using the YFI model to distribute tokens have followed one after another, among which YAM came the fastest.

YAM

YAM uses the token distribution model of YFI, and adds the flexible supply mechanism of AMPL on the basis of YFI. The coin price is anchored at 1 US dollar. When the price is above 1 US dollar, additional tokens will be issued to adjust the price.

Due to the huge benchmark effect of YFI, YAM has gained great attention, and YAM's pioneering liquidity mining model has led to a larger mining craze.

YAM had over $170 million in funds participating in just 6 hours after it went online, and the contract had not been audited, which was very unimaginable. YAM allocated tokens to the following pools. As long as you deposit funds into the contract, you can get tokens. The earlier you participate, the higher the return. This is YAM's groundbreaking design. In fact, YAM tokens do not capture any value, only governance value.

Source: https://www.panewslab.com/zh/articledetails/D61950915.html

Then came the emergence of SushiSwap, which changed the conventional routine of liquidity mining. Based on the YFI token distribution mechanism and YAM mining mechanism, it set its sights on Uniswap's liquidity pool.

SushiSwap

SushiSwap is forked from Uniswap. If you want to mine SUSHI tokens, you need to provide market making for specific trading pairs on Uniswap, and then pledge the LP tokens obtained from market making to SushiSwap . The reason why it is said to have set its sights on Uniswap's liquidity pool is that it plans to migrate liquidity two weeks after mining begins, and all liquidity mined in SushiSwap will be migrated to SushiSwap.

Source: sushiswap.org

This is an extremely terrifying attack on Uniswap, using the high returns generated by liquidity mining to tell an imaginative story, which will be able to provide support for prices and attract more funds to lock in.

Currently, Uniswap has locked funds of 1.2 billion US dollars, and SushiSwap accounts for 850 million US dollars. If all this liquidity is transferred to SushiSwap, this incident will undoubtedly have far-reaching impacts.

Source: debank.com

The extremely high yield rate of SushiSwap mining, and the fact that no development is required at all, made everyone feel like they had discovered a gold mine. After SushiSwap, countless copycat platforms were born.

Grapes, ham, pasta, shrimp, sushi, kimchi, ramen, etc. all appeared at once, and pearls, carrots, salmon, diamonds, corals, etc. appeared on Tron and EOS. At the same time, ecosystems such as Antminer and GXChain also started liquidity mining.

The tide of national mining has emerged.

Most of these imitation platforms were not audited when they were launched, but a large amount of funds still rushed in to mine the first mines, and of course, many people did make money.

The key question here is, if everyone knows that the token has no value, who would buy it? Of course, it can only be secondary market investors who think that the token price will rise and want to take a chance.

With the recent decline in the market, these carrots, salmon and other products that have no value have experienced a larger drop in price, and those who bought them in the secondary market have suffered heavy losses.

Among them, exchanges are not uncommon. BigONE, Hoo, Binance and others have launched mining financial management services with annualized returns of up to hundreds.

We can see that liquidity mining has evolved from initially encouraging users to provide liquidity and provide users with a better user experience to YFI becoming a better way to distribute tokens. As an aggregated financial management platform, YFI is still able to capture value.

As for YAM and its subsequent imitations, their tokens have no value other than governance value. If the influence is not large enough, the governance value is basically zero. Its essence is distribution for the sake of distribution, and its value support can only be achieved through continuous nesting and speculation in the secondary market.

Except for SUSHI, which has a good story, the others don’t even have a story. In essence, it is the pursuit of returns by funds, and in the process of pursuing, even risks may be ignored.

Therefore, the essence of liquidity mining is the capital’s desire for yield.

In the DeFi world, funds can flow freely and be nested continuously. After layers of nesting, a fund can obtain multiple benefits. Based on composability, funds have no loyalty and will flow to where the returns are high.

In such a situation, competition for liquidity will be the norm, and funds will always be scarce. Once someone can provide above-average returns with controllable risks, funds will quickly gather, and funds from other platforms will quickly drain away. (However, Ethereum's high gas fee has slowed down the speed of fund drain).

The continuous migration of funds will become the norm in future DEXs.

In the liquidity mining craze, we saw DEX’s extreme desire for liquidity, and SushiSwap opened up another dimension of the DEX liquidity war.

If the previous liquidity competition between DEXs was in the era of cold weapons, SushiSwap directly pushed the war into the era of hot weapons, and its cruelty is incomparable.

And because this model is not exclusive to SushiSwap, later entrants can do the same, and even Uniswap's counterattack can be done on SushiSwap in the same way.

At this point, we can see that the current DEX really has no moat. The industry advantages built up with years of hard work may be taken away by others in a few days .   The issuance of tokens is nothing more than a battle of yields, and it is still impossible to escape the situation of hand-to-hand combat.

This will cause DEX to spend a lot of energy to compete for liquidity, because it may be overturned at any time, which will force DEX to develop and iterate quickly. However, because it can be easily reused, no matter how much innovation there is, it will be difficult to escape the fate of being forked. At this point, it may force the application to no longer open fork authorization. This will be a blow to the open spirit of DeFi.

At this point, I can appreciate the beauty of 1inch even more. No matter where the liquidity is, I can provide the best liquidity without having to fight to the death for liquidity.

The focus of DEX’s subsequent development should be on how to find a balance between composability and moat, and this requires practitioners to work hard to explore.

But, maybe it will never be found?

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Statement: This article is the author’s independent opinion, does not represent the position of Blockchain Research Society (public account), and does not constitute any investment opinion or suggestion.