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DeFi is the ultimate in mobile mining design ideas

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How does this user-centric token distribution work?

Source: Chain smell

IDEX got a head start in October 2017, Synthetix improved in July 2019, and then Compound was added on a large scale in June 2020. As a better scrip distribution mechanism, mobile mining has already attracted the imagination of dozens of DeFi treaties.

DeFi's Ultimate Treasure Trove of Mobile Mining Design Ideas Incomplete list of mobile mining plans launched between June and September 2020

The impact of liquidity mining on the DeFi space is exciting. As of this writing, the total locked up value of DeFi's agreements exceeds $10 billion TVC, up from just $1 billion on June 16, 2020. This has also put pressure on the Ethereum network, with users flocking to DeFi to reap profits while Gas prices and transaction fees have reached record levels.

While the enthusiasm is reminiscent of the ICO bubble of 2017, the fundamentals of the current DeFi project are firmer.

In this article, I will explain what is fluid mining, what is successful, and what can be improved. While the DeFi area is evolving rapidly, I want to document most of the interesting developments that will provide useful information both for protocols that want to implement the mobile mining program and for users who want to participate in the mobile mining program.

Fluid mining 101

Liquidity mining is a network participation mechanism in which users fund a protocol in exchange for its native currency.

The term was coined a few years ago by Jake Brukhman, the founder of the CoinFund. He discusses the concept of "Generalized Mining" in the context of network participation by all parties. The nuance of liquidity mining is that the network has a specific demand, namely the supply of liquidity, users do not need to buy tokens, but will be rewarded with tokens, often a governance token that allows the holder to vote on the parameters of the agreement, including the value acquisition mechanism. Many people often call this "income farming."

Although these terms are often used interchangeably, income farming does not necessarily require tokens - for example, a liquidity provider, LP, can earn money from Uniswap only through a transaction fee.

Not all mobile mining schemes are created equal. Looking at the new deals launched over the past few months, there are three categories:

DeFi liquidity ultimate treasure dian mining design part of the project, not drawn to scale, the data source: https://docs.google.com/spreadsheets/d/1LNPXDOz6CuflFjCwfl-GNWq7vpCTLpIPpiWog6bF7Vc/edit? usp=sharing

Fair start: The main goal is to allocate most tokens not through direct sales, but by some other objective criteria (for example, active users as protocols) and to ensure that everyone gets an equal share. It's like assuming Uber has been owned by its drivers and takeout riders since day one.

Procedural decentralisation: The main objective is to progressively achieve community ownership and minimise asset management. Imagine, for example, that Uber signs a legally binding agreement to distribute a majority stake to its drivers and takeout riders over the next few years.

Growth marketing: The primary goal is to motivate specific user behavior over a predetermined period of time. Imagine Uber giving kickbacks with its stock for some of its customers' trips.

Each of these has its advantages and disadvantages, and the agreement may involve multiple categories at the same time. For example, Uniswap's hard-coded 2% inflation rate is a long-term programmatic allocation. The "best" approach will depend on the goals of the agreement.

The importance of fluid mining comes from a number of reasons:

More widespread distribution: IcOs in 2017 left many retail investors furious. The private rounds allowed a high proportion of tokens to be sold to big investors, who later dumped their positions and sent prices tumbling, leaving retail investors with heavy losses. Liquidity mining seeks to level the playing field by offering institutional and retail investors an equal opportunity to own the underlying scrip of the agreement.

Ultimate treasure dian, mot DeFi liquidity mining design and YFI be highlighted as "fair" to start, source: https://synthesis.substack.com/p/fair-launches-will-disrupt-crypto

Tighter linkages: The benefit of a liquidity mining scheme is that token holders are more likely to become subscribers. After analyzing the user base of scrip holders, the 0X protocol reached the following conclusions by the end of 2019, and the liquid mining effectively pushed the one-dimensional diagram Venn diagram closer together:

DeFi liquidity ultimate treasure dian mining design data acquisition since October 30, 2019, does not reflect the current cash distribution, source: https://drive.google.com/file/d/1sQx8A1jUhO0IQhiqF7gGkwkn0Qwps8Da/view

More inclusive governance: Users with partial ownership of the agreement have an incentive to help it succeed. By sharing potential financial benefits early, a liquidity mining program can enhance community participation and help the agreement initiate or transition to a decentralized organization DAO.

Speed up experimentation: In DeFi, liquidity = availability. The reflexivity of the liquidity mining program inherently drives the appreciation of tokens, which in turn drives more capital inflows, creating a flywheel effect that reduces the barriers to entry for new team projects to gain market traction. It could also lead to a downward spiral in the opposite direction -- just as bitcoin miners shut down their miners when the BTC price falls below a certain threshold, so liquidity-mining farmers withdraw money from AMM, the automated market-maker, or liquidity pool, if a DeFi economic mechanism fails to generate revenue. This cycle accelerated the pace of innovation that ultimately benefited the industry.

success

Dozens of experiments have been conducted over the past four months, and while it is easy to note that there have been failed protocols, many protocol design choices have been successful and should be incorporated into future iterations.

Reward long-term liquidity

Much of the current liquidity mining programme comes from "pure boli capital", which is not loyal to any agreement but seeks the most lucrative opportunities of the day.

You may have friends who have set up an account on every takeout startup App to get discounts or bully meals. The problem here is that short-term liquidity is worth less than long-term liquidity, and the liquidity mining programme should be adjusted to reflect this.

Ampleforth has done a good job of solving this problem by using a "time factor" mechanism in its Geyser project that rewards people for the length of time they have been saving. The "time factor" was 1 on the first day, 2 on the 30th and 3 on the 60th. So many people are willing to wait two months before withdrawing.

The length of time the money stays varies, but it is generally comforting. According to the team update on August 4 (43 days after the program was launched), approximately 6,036 unique users tried Geyser, while 4,242 users remained active that day (with a retention rate of approximately 70%).

Based on unconfirmed insider information, through September 8 (78 days later), Geyser (especially ampl-Uniswap pool) has 7,318 unique users and 3,193 active users (with a retention rate of about 44%). Given that there are so many other liquidity mining schemes coming up, the drop in the number of users is expected, but the drop in liquidity is even more intense - as of September 8, the ampl-Weth liquidity pool is about $9.5 million and the total deposit is about $83 million (with a liquidity retention rate of about 11%).

Parameters fine-tuning

Liquidity mining schemes should not be "one size fits all", and while agreement teams try to anticipate possible deviations from these projects, they need to adjust at any time.

Balancer has done well in the weeks following the launch of a liquidity mining plan by fine-tuning its parameters, adding five new parameters to reward specific types of liquidity, for example:

Coefficient of proportionality: A pool of funds that penalizes capital imbalances and provides less available liquidity to its traders

Cost factor: Penalizes high transaction fees because it makes the pool less attractive to trade

WrapFactor: Penalizing highly correlated assets right, because it leads to less useful liquidity attracted by Balancer

Balancer turned out to be a quick and continuous adjustment that struck a chord with LP. Before the project was launched on June 1, the number of LPS ranged from 1 to 15. That number jumped to 71 on June 1 and has been rising ever higher. The LP value in September was 861-1,517.

DeFi liquidity ultimate treasure dian mining design thinking source: https://explore.duneanalytics.com/dashboard/balancer

Cross-protocol community interaction

It's not always easy for LP to actively evaluate the opportunity cost of their participation in the project, and one of the effective ways to get them involved is to be consistent with the community they currently belong to.

YAM has done well in this respect by launching eight liquidity pools targeting the largest and most active scrip community in DeFi:

The YAM V1 interface is the ultimate in DeFi's mobile mining design

YAM's rapid growth was impressive, with assets locked up over $500m in 24 hours before the breach of the agreement was revealed:

DeFi liquidity ultimate treasure dian mining design thinking source: https://explore.duneanalytics.com/dashboard/yams-

Sustainable product Innovation

The DeFi protocol's liquidity mining program at above-standard levels does not make it a better protocol. The Compound, Curve, and Uniswap all excelled prior to the inception of the program and established functions and useful protocols prior to the program's launch, making it easier for people to get started on the program in the first place.

In addition, the branching agreement should not only focus on removing the distribution of founders and investors, but also focus on effectively adding new utilities to the agreement, so that the new agreement branched out has the competitiveness different from the original agreement.

Pickle Finance's product roadmap to date has worked well, including several novel income-generating investment strategies and, ultimately, a stabilisation currency arbitrage strategy aimed at restoring a fixed exchange rate between the stabilisation currency and the assets it anchors.

Based is also actively developing its roadmap, which includes a decentralised exchange DEX and a fair launch platform.

The tokens were distributed in a shorter time

Liquidity mining schemes that have been distributed for too long have lost flexibility in responding to market dynamics and changes in protocol strategies. Although the longer duration of the distribution is more suitable for token allocation, such token allocation can also be carried out on the open market, depending on the decision and timing preference of the buyer and the seller.

In addition, price discovery can be realized more effectively only when sufficient amount of circulation is introduced into the market. If a highly favored agreement USES a multi-year liquid mining program, but if the scrip is overpriced in the early days and the early days of circulation are low, early holders risk losing their investment and harming the community.

The release of Yearn's YFI token is an extreme example, and its 100% supply was distributed within nine days. From a market architecture perspective, there was almost no selling pressure on the seller side, as there were no previous holders, creating a virtuous cycle in which early entry of allied holders benefited most from the rise in tokens. The token is currently held by 13,507 addresses and has one of the most enthusiastic and engaged communities in the industry.

For teams that choose a longer program duration, one way to achieve balance is top-heavy distribution, because early liquidity is more valuable than late liquidity.

Similar to halving the bitcoin block reward, your protocol might have a decaying function, with the reward function increasing and decreasing over the first few days/weeks.

Longer reward unlock schedule

There is an economically attacked vector for a liquidity mining scheme in which other revenue-generating agreements (such as Yearn vaults, Harvest Finance) can participate and have no intention of holding their tokens for a long time. This reduces incentives for participants willing to stick with the long-term vision of the deal.

The team's withdrawal from the reward schedule may reduce the likelihood of such an attack, as mercenaries will think twice before getting involved in a plan. A longer reward unlock schedule reduces the likelihood of such an attack, as Pure Bolli will think twice before entering the game.

The redemption schedule also provides ample time for information to circulate throughout the market, helping the token to achieve price discovery by enabling the holder of the token to determine whether it is a viable long-term project (for example, clear token value accumulation, effective governance systems, active communities).

More performance parameters

Many agreements may start with no clear objective as to what specific results they want to motivate, or without metrics on the usefulness of these projects. Ideally, the team should know that "allocating X% of the token supply in week Y will result in an agreement that increases the liquidity of the Z dollar." Ideally, you would get a measure of the dollar cost per unit of liquidity and the duration of token distribution in the protocol. More effectively, you would get the CAC for encrypted native customer acquisition and the LTV for total lock-up volume.

UMA's liquidity mining program does well in this respect by asking the following questions for a particular pool of money at a fixed time:

"What percent of cultivators immediately sold the tokens that were awarded?"

"What percent of the cultivators voted in token money?"

"How wide is the distribution?"

The successful project once attracted THE ETH with a value of about $20 million and contributed some very important data points for the team, such as the "daily cost-of-liquidity", which ranged from less than $1000 to $4500 per million DOLLARS.

More equitable participation

Most of the current liquidity mining schemes have produced disappointing returns for large capital investors, hurting community participation and the distribution of tokens.

Based tries to solve this problem by using a single address to cap the amount pledged to the initial pool of liquid funds at $12,000. Pickle also tries to solve this problem by using a "second vote" to prevent the giants from gaining unequal influence over governance decisions.

While it's unclear whether orca whales created multiple addresses to circumvent the pledge and voting restrictions, it's at least a step in the right direction.

The supply of tokens is capped

In my opinion, long-term projects should not limit the supply of tokens. These agreements are more like companies than currencies, and no company restricts its ability to issue shares. In addition, the agreement is more vulnerable to vampire attacks because of the inability to create new liquidity mining schemes.

At the same time, continued high inflation could hurt the value of all holders of scrip. In addition, high inflation could exacerbate the attack vectors associated with governance, which could have serious implications for the broader DeFi ecosystem. For example, if an unlimited supply of inflation-adjustable token X was accepted as collateral for the Compound, a malicious participant could vote to mint countless tokens to steal all the collateral in the Compound.

One solution is to hard-code a portion of low-inflation tail scrip into a community-managed vault, or hard-code it into the ultimate inflation option, with an initial inflation rate of 0% and an inflation cap.

A common problem

In addition to the above recommendations, there are several general issues that need to be addressed in the mobile mining scheme:

Bugs: Although not intentional, mobile mining schemes can be exploited by users to steal rewards. For example, Compound, recursive borrowing/lending can lead to "fake" transactions that push out real users. According to some unconfirmed estimates, more than 30 per cent of the Compound reported supply (for example, there is currently $1 billion in supply, of which $700 million has no recursive value) falls into this category. This type of user behavior adds little value to the Compound because it is inaccessible to other users.

Technical risks: Security audits are expensive, and teams that want a fair start often do not have the resources to complete security audits in advance. This leads to the discovery of errors in the main network contract, resulting in the user's loss of funds. This also allows people with technical expertise or resources to gain a front-running advantage by checking the accuracy/safety of contracts. Fair Launch Capital tries to address this problem by offering no-strings-attached grants to cover the cost of audits and releases.

"Run away with the money" : Even if there are no inadvertent loopholes, most current mobile mining projects are started by anonymous founders, creating the best conditions for scammers. These scammers may exploit the smart contract with little or no response (such as calling the Mint () function such as Hotdog, or simply selling tokens in the Yuno protocol). Users with a strong technical background can understand attack vectors using tools such as Diffchecker, but mobile mining remains a high-risk game for retail players.

Information asymmetry: Although the goal of mobile mining is fair distribution, insiders may have an unfair advantage over retail participants in the first few minutes/hours of a mobile mining plan. One way to solve this problem would be to give full notice of the commencement of the mobile mining programme.

Gas Costs: Ethereum's high Gas fees often drive small players out of the competition, leaving the liquidity mining scheme to those who can afford to pay the Gas fees. This hurts token allocation and low-value items, such as those focused on NFT and games.

conclusion

Despite the extensive testing of the DeFi mobile mining project, we may not have reached the optimal allocation model yet, but make no mistake - the mobile mining has evolved to where it is today.

Moreover, while many of the mobile mining schemes have been successful at the time of writing, the reader should note that we do not know the long-term impact. I look forward to doing one more review six to 12 months from now.

Thanks to Dan Elitze, Christopher Heymann, and Michael Anderson for their feedback on this article.