A simple understanding of DeFi's fluid mining

Original title: "A Simple Understanding of DeFi's Fluid Mining"

Source: Blue Fox notes

Less than a month since The June 15 release of Compound COMP for governance, mobile mining has become the hottest topic in crypto circles, and more and more projects are launching their own mobile mining. So what is DeFi's mobile mining?

Blue fox notes below a simple elaboration, this article is suitable for beginners to read.

An outburst of fluid mining

· Compound mining effect

Compound fluid mining has developed a siphon effect similar to that of a small black hole. At the time of writing, total Compound deposits were more than $1.39 billion, roughly a 10-fold increase from 20 days ago, and total loans were more than $770 million, roughly a 30-fold increase. The number of deposits reached 30,616, and the number of borrowers reached 4,248. In less than a month, the changes have been breathtaking.

(Current Compound total deposits and Total borrowings,Source:Compound)

In addition, after the release of Compound liquidity mining, its spilover effect is also very obvious. Curve's stability currency, for example, has surged; Another example is the change of mine allocation rules in the past few days, which directly led to a surge in DAI's demand. These are all direct effects of Compound on DeFi circles.

· A big increase in Balancer

Balancer was the second recent mobile mining project, after the Compound. Its liquidity from less than $20 million on June 5, grew to $140 million on July 5th, in a month time has increased by about seven times, become the most liquid of DEX project, at the same time, it also is in rapid growth, from the point of its latest week of trading volume, has been among the top three, after Uniswap and Curve, and also continue to rise trend.


(Balancer7 top DEX volume,Source:DuneAnalytics)

· Quite a few are on the way

Besides Compound and Balancer, there was Curve, Bancor, Thorchain, mStable, BZX, Kava... And so on. The entire DeFi sector is prone to mining sprawl, and more is on the way. The overall trend is that liquidity mining is bound to overheat, with some whales selling off their deposits to lock in gains without even keeping their tokens.

What is DeFi's fluid mining?

· What is DeFi first?

DeFi is Decentralized Finance, meaning Decentralized Finance or distributed Finance. They are products that run on a common chain, such as Ethereum. These products have tamper-proof operational logic, which is often referred to as a tamper-proof intelligent contract.

Why run on a blockchain like Ethereum? Instead of developing financial products to serve users? Because a common chain such as Ethereum is made up of thousands of nodes, each node maintains the same network status record and code. All its transactions and states need to be agreed upon, and no single node can change the history and state of the transaction at will, nor can it change the contract code at will. Running a financial product on a public chain means that it cannot be tampered with, and that it is not licensed and everyone can participate, which is why DeFi is part of open finance. Finally, it is composable and can be built, connected, and combined based on these financial products, which leads to all kinds of innovations, which is why the term DeFi Lego is often used.

In practice, however, it is almost impossible to make good money from small mines because of high gas fees on Ethereum and technical barriers such as management wallets. From this perspective, the current DeFi liquidity mining cannot be considered as inclusive finance or truly open finance because it has relatively high capital and technical thresholds. This is something that the subsequent public chain and the DeFi products running on it require continuous iterative upgrades to resolve.

Because DeFi runs on a public chain, it is permissibly-free, tamper-proof, and composable, meaning that anyone can participate in financial activities such as lending, trading, and so on. In short, DeFi is a completely new field.

· Second, what is fluid mining?

Currently, DeFi's liquidity mining is mainly for products on the Ethereum blockchain, and it earns revenue by providing liquidity for DeFi products on Ethereum. To put it simply, mining can be carried out by depositing some token assets, which is called mining after the bitcoin mining industry. In the Compound for liquidity mining, mainly in the above to deposit tokens or lend tokens and other operations, so as to get COMP management token reward. COMP tokens represent governance over the Compound agreement. COMP holders can vote on the direction of the Compound Agreement. If Compound business has value, then COMP has natural governance value.

In the case of liquidity mining in Balancer, it provides liquidity for the trading token pool, such as the bal-weth pool. With regard to the BAL and WETH, as the liquidity provider can enter into BAL and token in a certain proportion (such as 80:20), and obtain BAL token and related transaction costs according to certain rules.

In a nutshell, liquidity mining is mainly through the provision of token assets, thus making a profit.

What are the benefits of liquidity mining?

Liquidity mining income including governance tokens, transaction fees. Liquidity mining can simply earn passive returns by depositing tokens, but if it wants to earn higher returns, it needs to be managed at rates that vary widely from one protocol to another, and even within the same agreement from one currency market or pool to another.

The yield of liquidity mining depends on many factors. Since the amount of tokens issued in each period (daily or weekly) is basically fixed, the yield mainly depends on the price of the reward tokens, the weight of the liquidity itself (determined by the influence factor) and the proportion of the total liquidity. Prices for Compound tokens, which peaked at over $330, have now dropped to $186. At the same time, with the increase of total deposits and total borrowings in different money markets, the mining income is also diluted by more and more liquidity. The Compound used borrowing rates in different money markets as an important basis for their allocation, but this factor has now been removed. This has a great drainage effect on the asset flow in the money market. The change in the rule has greatly stimulated demand for DAI, a Compound currency that used to have the highest lending rate and therefore the highest liquidity.

Change to the Compound assignment Rules.

Balancer had a similar experience. The BAL price broke through $20 after going public and now fluctuates around $11. The BAL price is fixed at 145,000 per week. Currently in Balancer, there is also a difference in the weight of BAL token reward in different liquidity pools, for example, some pools have a weight of 1, while others have a weight of only 0.08, which will lead to a significant difference in BAL allocation. Through the setting of such an impact factor, it will have a guiding effect on the capital flow, and a higher weight for high-quality token pool with stronger exchange demand is conducive to its positive development.

Balancer had a total liquidity of more than $150 million by the time blue Fox notes was writing, with an annual BAL distribution of 7,558,418. In addition to the proceeds from BAL scrip, the liquidity pool in Balancer could also capture transaction fees, although at the moment this is a small proportion of the proceeds.

Liquidity mining maximizes returns

Liquidity mining can be leveraged to maximise returns, but it also carries greater risks. Users can operate within the same protocol or across protocols.

On Compound sites, for example, it allows users to leverage because it rewards both lenders and borrowers. The user deposits DAI, borrows DAI, deposits DAI again, borrows DAI... There are about 170 million DAI on the market today, while Compound DAI has $568 million in deposits and a total of $517 million in loans. Of course, it also carries greater risks.

DAI's total deposits and total borrowings surged in two days.

In addition, users can cross agreements, such as lending in Compound tokens, and then providing liquidity for Balancer, which is profitable if Balancer and Compound pay more than the interest rate on loans.

The fluidity of the mine siphon

· Internal equilibrium

As more and more agreements provide liquidity to mine, money will flow to where it is most profitable and maximise the use of assets between different agreements. The balance of risks and benefits is achieved initially within the agreement and finally between the different DeFi protocols. Eventually it will be in equilibrium with the outside world.

· Siphon off external funds

More important, of course, is not the scramble among the DeFi protocols, but the siphons of money from outside the ecosystem, such as from CEX, institutions, and so on. It's not big yet, but it's happening, and it's accelerating.

The risk of fluid mining

Liquid mining can be lucrative, especially early on, but it is also fraught with risks. The risks here include the risk of intelligent contract, the risk of prediction machine, the risk of black swan, etc. When significant risks occur, they can lead to big losses that dwarf gains.

In addition, with the influx of more and more capital, it may enter the stage of overheating, mining gains cannot be sustained, and once the bubble bursts, it will easily lead to asset losses. One of the purposes of liquidity mining is to decentralize the scrip. It is also a scrip distribution mechanism that allows more people to participate in the development of the protocol. However, not all participants are users with real needs. For example, how many of today's Compound users are users with real borrowing needs? Are the future interests of the liquidity mining participants consistent with the agreement? What will happen if the liquidity mining gains are unsustainable?

In a word, to want to carry out liquidity mining or investment management token novice, in addition to see high earnings, but also to prepare for risk control.

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