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DeFi 2.0 Project Are Testing Liquidity Mining Alternatives

The Defiant | Owen Fernau | Oct 14, 2022

olympusdao - DeFi 2.0 Project Are Testing Liquidity Mining Alternatives


Brace yourselves because here comes DeFi 2.0. What that term actually means is still in flux. While DeFi 2.0’s meaning is …

  • While DeFi 2.0’s meaning is still congealing, the new crop of DeFi projects centers around the idea called protocol controlled liquidity (PCV). This entails projects acquiring funds to support their financial applications, rather than tapping users’ funds by enticing them with liquidity mining rewards.
    • DeFi 2.0 is mostly about DAOs changing the relationship between capital providers and the protocol itself.Tyler Reynolds
  • Problem:  In a nutshell, liquidity mining involves protocols giving their native token to users in exchange for depositing assets that other users can borrow or trade. The problem is that protocols are watering down their token’s supply in exchange for capital deposits, which are often temporary. So come in, lend their assets to the protocol while milking its rewards, then leave with both the assets and rewards, leaving the protocol high and dry.

See:  BoE Speech by Carolyn Wilkins on DeFi Governance Limits and Opportunities: Get Up, Stand Up!

  • “Profit taking is expected, but when a giant player comes in and exclusively dumps the governance token, it creates a dynamic where all price appreciation is nullified,” Scoopy Trooples, the founder of Alchemix, the auto-paying loan app and critic of excessive liquidity mining, told The Defiant. “This depresses the community and convinces them to do the same or else they won’t ever be able to realize their gains.”
  • There are countless examples of this phenomenon — a project called Big Data Protocol attracted over $6B in total value locked during a six-day stretch of liquidity mining rewards only to fall to a current level of only $3.1M, according to DeBank.
  • Experimenting with alternatives:  OlympusDAO sells its token at a discount in exchange for tokens like DAI, but also liquidity provider (LP) tokens which include OHM. So for example, a user could trade their OHM-DAI LP token, which represents a liquidity position in the decentralized exchange Sushiswap, for OHM. Olympus calls this mechanism a bond, because the discount is paid out over five days. Olympus has another innovative mechanism — a staking function which pays users in additional OHM tokens in exchange for locking the token up. This counteracts the sell pressure which comes from users’ ability to get OHM at a discount with bonds. Staking is working — over 90% of OHM is staked today according to the project’s primary dashboard.

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