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Overview of the phenomenon of liquidity mining in 2020: the potential is still there, and the residual temperature has not receded

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Revenue is the number one driver of user engagement, not the desire for governance.

Original title: "Inside Yield Farming 2020: What's the trend?"

Original source: Hackernoon

Original translation: 0x13

In 2020, after the rise of liquidity mining, it quickly swept the cryptocurrency industry and became the cornerstone concept of DeFi in 2020, and it may go far beyond this scope. The craze started with Compound, the first project to launch this investment mechanism in June 2020. While yield mining is still a fairly niche strategy, its popularity is accelerating.

Experts from Platinum software development company have analyzed the status quo of liquidity mining, the following is Rhythm BlockBeats Compile the report:

What is liquidity mining?

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Liquidity mining is a new way for users to earn passive income in the DeFi ecosystem, basically by making more crypto out of their existing crypto holdings currency.

How does liquidity mining work? First of all, among the participants in liquidity mining, the user is called a liquidity provider (Liquidity Provider, LP), who adds his or her encrypted currency assets to a smart contract (liquidity pool) of a certain DeFi platform. For this, they are rewarded in the form of tokens.

Currently, liquidity mining is usually performed on the Ethereum blockchain and its ERC-20 standard, because Rewards generally also belong to the Ethereum ecosystem. However, this may change in the future as the demand for liquidity mining grows. At some point, this yield mining trend will shift to other blockchains and will be supported by other types of blockchains.

Liquidity mining as an investment strategy started with the Compound platform and their COMP governance token distribution system, The system provides high interest rate returns to Compound lenders and liquidity providers. Before the program went live in June 2020, Compound Energy was the second-largest DeFi application locked in its smart contracts. Within a day of starting mining, Compound surpassed Maker DAO, and the COMP token became the largest market capitalization of DeFi tokens.

Many DeFi protocols have followed Compound’s example, introducing yield farming into their ecosystems. Examples include Yearn.Finance, Curve.Finance, Synthetix, Balancer, and Sushi.

Unlike the usual DeFi deposit strategy, which only provides 10% of the output per year, users participating in liquidity mining expect Higher returns. At the very beginning, most liquidity mining users were promised APY as high as 100%. However, there are many complexities and huge risks behind liquidity mining. In search of ultra-high returns, users often need to frequently move their funds from one DeFi protocol to another. In turn, this requires deep analytical skills, constant monitoring and quick reactions to any changes in the market, even the slightest.

After analyzing multiple sources of analysis for the cryptocurrency and DeFi markets, Platinum here maps out the liquidity mining Key characteristics of the mine - production and APY, behavioral patterns of key players, salient trends, and necessary signals to watch out for.

Liquidity Mining Market Overview

According to CoinMarketCap, as of October 3, 2020, the total locked value of the liquidity pools of liquidity mining projects exceeded $4.9 billion. The total locked value of the entire DeFi market is $10.94 billion. This means that nearly half of DeFi’s locked output is related to liquidity mining.

Liquidity mining platform revenue ranking

At the time of writing, the five major liquidity mining platforms are as follows:

Uniswap: locked The total value (TVL) of the project reached $1.7 billion. Depending on the pool and cryptocurrency pair, the APY ranges from 23.82% (ETH/WBTC) to 33.85% (ETH/DAI). However, impermanence loss is high.

Curve: The total amount locked in the pool also exceeds $1 billion. Curve’s APY is significantly lower than Uniswap’s, dropping from 5.80% p.a. to 15.99%.

Sushi: TVL is valued at nearly $310M while APY ranges from 17.07% to unbelievable 109.24% of (for YAMv2-ETH combination). Like Uniswap, impermanent losses are also high.

Yearn.Finance: Its total value is almost a third of Curve and Uniswap at $300 million about. Annual yields for Yearn.Finance users range from 0.05% (aLINK token) to 13.29% (TrueUSD stablecoin).

Harvest: This pool has a total locked value of $170 million. Annual yield 23.04% - 106.82%.

Liquidity Mining Popularity

According to a liquidity mining survey conducted by Coingecko in August-September 2020, 23% of respondents participated in liquidity mining in the past 60 days (July-August) mine. This is a clear testament to the transformation of yield farming from a niche phenomenon to a stable investment strategy widely adopted among cryptocurrency users.

Geographically, the majority of participants were from Europe (31%), Asia (28%) and North America (18%). This distribution makes perfect sense as these specific regions are the main drivers of the cryptocurrency and DeFi movement.

The motivation and strategy of liquidity mining are obvious, for the governance token provided by the liquidity mining protocol. Governance tokens are coins that give holders the power to influence decisions about the protocol, product development, and roadmap, affecting fundamental changes in governance parameters. However, Coingecko’s research shows that most yield mining users are not interested in governance or the project itself — they are primarily concerned with their assets and profits.

As shown in the figure, the vast majority of respondents believe that their interests are the main motivation for participating in high-yield liquidity mining; 54% of users intend to use long-term holding; while 32% of them are income and selling . Only 11 percent were interested in governance opportunities.

Risk Awareness of Liquidity Mining Users

< p line="8hFF">Liquidity mining offers high interest rates, making this investment strategy profitable for both investors and speculators. At the same time, there are huge risks in this approach, very similar to the risks of the ICO boom in 2017.

Common types of concentration risks in liquidity mining

Protocol attack. Assets lent by holders are "stored" in the protocol (smart contract), which is a piece of software. Hackers are always finding new ways to exploit vulnerabilities in code and steal cryptocurrencies.

Crypto market manipulation. When a user lends cryptocurrency by adding it to any protocol, and then borrows it back, they basically amplify the demand for that token, making its price go up.

Complex strategy. We have already outlined that in order to maximize returns, liquidity mining users often move their assets from one DeFi application to another. Any mistake can make the user lose all the profits gained so far.

Regulations. Security tokens, DeFi, and cryptocurrencies are the subject of endless debate between governments and financial institutions. Their stance and the policies they adopt can determine the success or failure of liquidity mining and even the crypto market.

Worryingly, despite a generally cautious approach, a large proportion of users are Risks associated with liquidity mining are poorly understood. They value high returns above all else. In particular, 40% of respondents did not know how to check smart contracts for security breaches or scam signs, and nearly a third (33%) did not know what impermanent loss means.

User plans to continue liquidity mining

High returns are a key incentive to attract investors and speculators to the liquidity mining market. At the same time, the high gas fees and multiple risks in the Ethereum network may discourage small or inexperienced players. Is this assumption correct?

According to the survey results, despite many troubles and potential dangers, the majority of DeFi participation respondents (70% of respondents) strongly want to continue mining, while 25% remain skeptical. This means that only 5% of participants explicitly stated that they plan to stop participating in liquidity mining.

DeFi Venture Capital

Liquidity mining is expected to become a glimmer of hope in the DeFi field, expanding the scale of the industry and attracting financial capital and new players to enter the field. VCs from Silicon Valley have expressed their interest.

To name a few, Framework Ventures Co-Founder Michael Anderson spoke to Chainlink (in 2017 as angel investors) and Synthetix ($3.8 million in 2019, purchased 5 million SNX tokens).

ParaFi Capital is a Silicon Valley-based VCl fund focused on decentralization by investing $4.5M in open source lending protocol Aave Financing and Blockchain. As of today, Aave is one of the world's leading DeFi lending protocols. The main and most innovative feature of the platform is its "Flash Loans", where users can borrow quickly and easily without requiring any collateral. Aave also integrated with Uniswap, becoming the first DeFi protocol to support Tether.

There are many other agreements that received investment in 2019-2020, including the Injective agreement, which raised 2.8 million $; FinNexus raised an undisclosed amount; Hedget raised $0.5M; Alpha5 raised $1.5M; Serum raised $1M... and so on and on and on.

DeFi Software Development Status

As DeFi becomes more popular (10,000% growth from Q2 2019 to Q3 2020), more and more financial services companies want to embrace blockchain and move away from traditional financial architectures Move to a decentralized ecosystem. This, in turn, has created a high demand for such service and platform providers — outsourced IT companies capable of building and delivering complex enterprise-grade DeFi solutions.

The DeFi development market is immature, and it’s easy to explain why. Blockchain companies need to have deep knowledge and multifaceted experience in building decentralized exchanges and DApps

products, tokenization, deploying non-custodial protocols, DeFi asset management, etc. expertise.

Now you might think that finding a partner who can build a DeFi solution is impossible. However, such suppliers are still possible. Antier Solutions, DeFi Solutions, Technoloader, and of course Platinum Software Development Company.

Summary

Let's outline the main points :

Liquidity mining is a high-return investment strategy (APY up to 100%), in COMP governance The coin experienced extreme hype after launching this way. In a way, the popularity of yield farming is similar to the ICO frenzy of 2017.

The total locked value of the liquidity pool in the liquidity mining project is almost over 5 billion US dollars, so the liquidity Mining is likely to grow further. Currently, the mainstream platforms for liquidity mining include Uniswap, Curve, Sushi, Yearn.Finance, and Harvest.

Liquidity mining is no longer a phenomenon known only to a small group of users. It is gradually becoming a widely adopted investment strategy for cryptocurrency holders. Most farmers come from Europe, Asia and North America.

Although liquidity mining usually involves governance tokens, users are less interested in governance and voting. High yield is still the main reason for them to engage in liquidity mining.

Liquidity mining poses enormous risks involving hacking, regulation, and the overall complexity of strategy. It requires that users providing liquidity should be experienced, responsive, and sensitive to any changes. However, a significant portion of users remains poorly informed about the associated risks.

The yield frame is here to stay. In search of huge profit potential, most users do not intend to give up liquidity mining in the future.

The growing need for liquidity mining has attracted venture capitalists to DeFi platforms. Companies like Synthetix, Chainlink, Aave, Injective Protocol, and others have all received VC funding.

The market for DeFi software development companies has not yet formed, although strong competitors already exist.