DeFi 2.0 Wave of new projects test liquidity mining alternatives

Things aren’t getting any easier for those struggling to keep up with the lightning-fast DeFi space. Just when you think you’re up to speed with the latest token or protocol, along comes something new. Brace yourself, because here comes DeFi 2.0. What that term actually means is still up for grabs.

While DeFi 2.0’s meaning continues to solidify, a core component of DeFi’s next evolution includes alternatives to a mainstay of DeFi 1.0: liquidity mining. Projects like OlympusDAO, Fei Protocol and Alchemix are all experimenting with new ways to capture users with the new challenge of keeping them.

The new crop of DeFi projects centers around the idea called protocol-controlled liquidity (PCV). This involves projects obtaining funds to support their financial applications, rather than leveraging users’ funds by enticing them with liquidity mining rewards.

“DeFi 2.0 is mostly about DAOs that change the relationship between capital providers and the protocol itself.”

Tyler Reynolds

“Profit-taking is expected, but when a giant player comes in and exclusively dumps the driving license, it creates a dynamic where all price appreciation is nullified,” Scoopy Trooples, the founder of Alchemix, the auto-pay loan app and critic of excessive liquidity mining, told The Defiant. “It depresses the community and convinces them to do the same, otherwise they will never realize their gains.”

In a nutshell, liquidity mining involves protocols that give their native token to users in exchange for depositing assets that other users can borrow or trade.

The problem is that protocols water down their token’s supply in exchange for capital deposits, which are often temporary. So people come in, lend their assets to the protocol while milking the rewards, and then leave with both the assets and rewards, leaving the protocol high and dry.

There are numerous examples of this phenomenon – a project called Big Data Protocol attracted more than $6 billion in total value locked during a six-day liquidity mining rewards only to drop to a current level of only $3.1M, according to DeBank .

Sometimes liquidity mining programs are not so short-lived. Compound Finance, a lender and pioneer of the liquidity mining model, was net negative when liquidity mining was subtracted from protocol revenue as of July 15, according to a chart posted by Andrew Kang of Mechanism Capital. Compound has a long-term and ongoing liquidity mining program that goes along with its COMP token.

Regardless of the duration, liquidity mining is a questionable choice that dilutes a project’s supply and attracts mercenary capital as Big Data Protocol’s program exemplifies.

So what does this have to do with DeFi 2.0? Well, there are a series of projects that avoid liquidity mining and experiment with alternatives. OlympusDAO, a project that aims to offer what the project calls on its website a “decentralized reserve currency,” in its OHM token.

OlympusDAO sells its token at a discount in exchange for tokens such as DAI, but also liquidity provider (LP) tokens that include OHM. So for example, a user can trade their OHM-DAI LP token, which represents a liquidity position in the decentralized exchange Sushiswap, for OHM. Olympus calls this mechanism a mortgage, because the discount is paid out in five days.

The new crop of DeFi projects centers around the idea called protocol-controlled liquidity (PCV). This involves projects obtaining funds to support their financial applications, rather than leveraging users’ funds by enticing them with liquidity mining rewards.

This system allowed Olympus to own its own liquidity, a big difference from projects that watch liquidity disappear as rewards run out. OlympusDAO’s statistics page says the protocol owns more than 99% of the OHM-DAI liquidity. And that liquidity isn’t going anywhere because Olympus itself owns it (and earns LP fees with the LP tokens).

Olympus has another innovative mechanism – a staking feature that pays users in additional OHM tokens in exchange for locking the token. This counters the sales pressure that comes from users’ ability to get OHM at a discount with bonds. Strike works – more than 90% of OHM is logged today according to the project’s primary dashboard.

Thus, without tapping into liquidity and an example of the DeFi 2.0 movement, OHM reached the 55th slot in market capitalization terms among all digital assets at over $2.9 billion.

Olympus recently launched Olympus Pro, which aims to “become the new industry standard platform to help protocols obtain their own liquidity,” as the project’s documents say. Olympus Pro does this by offering a bonding service, similar to the one it uses to obtain its own liquidity tokens.

Other projects, which you can consider to be part of DeFi 2.0, are jumping on board – Alchemix, Abracadabra, the stablecoin issuer shooting for MakerDAO, and others have chosen to use Olympus Pro in efforts to control their own liquidity as part of DeFi’s new wave.

Leased Liquidity

Achemix’s ALCX token rose more than 30% in the past week and Abracadabra’s SPELL rose more than 150% in the same period.

“Protocol-controlled value brings sustainability so you can maintain the growth you’ve had without eroding the community,” Trooples said. The founder is thinking of protocol controlled value as another node projects can use in addition to liquidity mining.

There are other projects that implement the protocol controlled value model – the Fei protocol, which issues the FEI stablecoin, was one of the early pioneers and has just launched a v2. Fei’s native TRIBE token has risen more than 40% in the past week, according to CoinGecko.

“DeFi 2.0 is mostly about DAOs that change the relationship between capital providers and the protocol itself. The move in DeFi 2.0 is that protocols own their own liquidity,” Tyler Reynolds, an angel investor and crypto advisor, told The Defiant. This is in contrast to ‘DeFi 1.0’ where protocols earned TVL by providing the best user experience or rented liquidity through liquidity incentives.”

Other projects such as Pod Finance, an options protocol launched on October 11th, offer NFTs to liquidity providers, as an alternative to liquidity mining with volatile ERC-20 rewards.

While the search for alternatives to liquidity mining is one of DeFi 2.0 features, it is not the only one. Another part of the emerging movement includes forks, or iterations of the OG DeFi protocols.

Rari Capital, which offers isolated lending pools and recently unveiled a permissionless feature that allows anyone to create said pools, crossed the $1 billion mark in TVL on October 12. Rari reiterates what Compound Finance has done, essentially allowing users to circumvent the OG protocol. pools and customize them, instead of limiting users to one pool.

Abracadabra is experimenting with allowing users to deposit interest-bearing assets as collateral and lend against those assets. This contrasts with MakerDAO, which accepts some interest-bearing assets as collateral, namely LP tokens for popular Uniswap trading pairs.

These rapid developers happen, while DeFi Pulse Index, which includes the tokens of open finance pioneers such as Aave, Uniswap, Compound and Maker, has fallen more than 10% in the last 30 days, according to the project’s website, new projects are avoiding liquidity exploit and shape what is becoming DeFi 2.0 with their design decisions.

Crypto is the land of FOMO, where disruptors disrupt almost daily. But with the model of protocol-controlled value leaving liquidity mining behind, there is real change afoot in DeFi.