DeFi money printing machine never sleeps, how long can liquid mining be hot?

​​Last weekend, the "Ethereum Divine Mine" BDP detonated the liquid mining market. Single-currency mining, with an annualized return of more than 1400%, and the rapid entry of US$6.5 billion in funds, making BDP the project with the highest locked-up value in DeFi. On Ethereum, it seems that there has not been such a hot liquid mining project for a long time, and it has suddenly regained the limelight of BSC and HECO. The liquidity mining boom continues, but how long can this boom last?

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A brief history of liquid mining

Liquidity mining has become popular in the DeFi market and should start with Compound. On June 16, 2020, Compound started liquid mining. In just 20 days, the lock-up amount increased from approximately US$180 million to US$650 million, and the number of users increased to approximately 6,000. Since then, many DeFi projects such as Synthetix, Balancer, and Curve have launched liquid mining plans. The total amount of DeFi locked up has surged, from about 1 billion U.S. dollars on June 16 to about 15.1 billion U.S. dollars on September 27. It has risen 14 times in less than 4 months.

This is an era when the "sweet mines" are all out. In the afterthought of the market forces, the DeFi miners who entered the game first enjoyed the annualized income of hundreds of thousands every day. While harvesting a lot of coins every day, the price of coins is also rising. YFI, which was called "no value" by the founder AC, was only $3 when it was marketed on Balancer. In less than a week, the price soared to $4,500. On the 7th day of landing on Huobi, YFI once touched US$44,000 on August 30, 2020, which is higher than the price at the time of writing.

Then, a large number of fork projects began to emerge. Uniswap's fork project Sushiswap, Curve's fork project Swerve, YFI's fork projects YFII, YFIII, YFV... At the same time, more and more investors have also joined DeFi mining. In the army. With more and more projects and more and more miners, the market has finally changed from the previous "one pool, two pools without brain mining, secondary market without brain access", and "mining and selling" has gradually become miners at this stage. Consensus. Finally, the inflow of funds could not keep up with the pace of DeFi printing machines, and the DeFi market ushered in its first low tide at the end of October and early November. At that time, Bitcoin finally started after a few months of sideways silence. Most people did not expect that this rush actually rushed to nearly 60,000 US dollars.

Bitcoin has risen all the way, without a callback, DeFi tokens have repeatedly set new highs with each round of rising funds, and UNI has stepped closer to the top 10 in market value. At this stage, "hold and see xxx" has become more voices in the market. Liquid mining has lost its starlight a few months ago. When it once again swept the entire industry, it is already 2021. BSC and HECO once again let liquidity mining take off! From January 21 to February 18, in less than a month, the total lock-up market value of BSC completed a breakthrough from 0 to 10 billion. As the largest DEX on Heco, MDEX has been online for one month, and its trading volume has surpassed Uniswap. Ultra-high annual returns, amazing token price increases, and liquidity mining have once again exploded with a huge wealth effect.

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How long can the boom last?

With the explosion of liquidity mining, we have to thank the macro market. There is really too much money in the market. According to some research, in 2020, the US money printing machine put 9 trillion US dollars on the market, accounting for 22% of the total US dollars since the founding of the People’s Republic of China. With floods flooding, the total market value of DeFi tokens (including stablecoins) has exceeded US$85 billion (CoinMarketCap data on March 10). We can see UNI with a market value of US$16.6 billion and Aave with a market value of US$5.3 billion. So much money rushed to the BSC and Heco of "Ethereum DeFi overflow". Trading, lending, machine gun pools, insurance, derivatives...The various subdivisions of the DeFi ecosystem are completely re-arranged on the two chains, IDO, liquidity mining, airdrops, and all actions are repeated again. We also have public chains (NEAR, Avalanche), Layer 2 networks (Polygon), and the TRON ecosystem behind. The entire set of DeFi gameplay will continue to be copied over and over again. There is still a lot of money in the market, and it is still supporting the expansion of DeFi and the enthusiasm of liquid mining. So, one day, when liquidity is tightened, can liquidity mining still be so hot?

The DeFi market continues to expand, with countless fork projects appearing every day. Stani Kulechov, founder of Aave, said in an interview a few days ago that most of the liquidity mining incentive plans are to copy existing well-known projects and did not propose innovative solutions for distributing governance tokens and involving the community in governance. Many protocols use mining. The mining plan is completely unsustainable, it is "printing money." On the other hand, the original intention of most liquid miners to participate may not be governance, more or just for incentives. So, how can project parties with weak backgrounds and less interesting products not increase their printing efforts to attract liquidity? In the end, "digging and selling, running fast", some investors joked that "mining is afraid of overnight" or even "mining is afraid of going to the toilet".

As the project party adopts decentralized governance, such as YFI and other projects, governance tokens have been completely distributed to the community, and governance aspects also affect the design of liquidity mining. In Babbitt’s previous article, we introduced a case. In the analysis using Curve as an example, there is a problem of excess liquidity in the liquidity pool (TVL). The reduction of the number of tokens put into the pool by the project party will lose some liquidity, but it does not affect the actual trading experience. This is a solution worth studying for the sustainability of liquid mining. But in a community vote, it may be difficult for the majority of people to vote for it at the expense of their own interests.

Another issue that has to be raised with liquidity mining is the big players. In the hot and unusual BDP project a few days ago, the assets held by the four "giant whale" addresses accounted for 41% of the total lock-up volume, and Justin Sun alone deposited 1.6 billion US dollars in assets. In the face of absolute capital, ordinary investors can only drink soup. For investors with smaller funds, the mining revenue may not even be enough to recover the handling fee. Retail investors can't eat meat or even drink soup. If the secondary market accepts the order and loses money, it may be "not in love".

Back to the basics, liquidity mining is to encourage investors to provide liquidity for the project and provide economic incentives by "printing money". Many projects distribute governance tokens. It is undeniable that the exploration of DAO and decentralized governance is very meaningful.

But what the market recognizes more is the trading and speculative value of tokens. When we get the governance token, we can hold it until it rises, we can sell it immediately, we can go to mine, we can interact with other DeFi protocols, and the ultimate essence is all for trading and for profit. Almost the entire DeFi development is based on transactions as the core demand. Based on the continuous entry of external funds and the continuous increase of token prices, the design logic of most products is also based on the positive spiral of the market. When the bear market comes and transaction demand drops rapidly, how can liquidity mining get up and running?

In fact, this is also the problem that the native assets on the chain have always faced: what is the use of tokens? The other end of the traditional financial market is connected to the real economy, and on the other end of DeFi we also hope to be able to connect more things. The DeFi world urgently needs to connect with the real world, explore more practical values, and say no to castles in the sky!