To keep token prices healthy and protocols afloat, DeFi has mainly relied on liquidity mining efforts through projects allocating part of their issuance to distribute rewards to those who stake liquidity provider tokens. As we wrote in previous articles, however, this is an unsustainable practice within the ecosystem.
Since liquidity is the backbone of DeFi, how can projects ensure that slippage remains low in pools or in order book-based DEXes so that price action can happen as naturally as possible?
The key currently relies on protocols owning their liquidity. If projects control their liquidity, they generate revenues from it and increase their PCA (protocol-controlled assets), strengthening its token.
Because of the rapid development of this space, there are a few names popping up recently that intend to address this issue.
One of them is called OlympusDAO, with the OHM token. OHM has the objective of becoming a reserve currency in the crypto space, wholly detached from fiat currencies.
OlympusDAO has recently been on the crypto spotlight because of its incredibly consistent high APYs for those who stake it in their platform, attracting many new users.
However, what it allows for is a consistent way of increasing its treasury to make sure that every OHM minted is backed by other crypto assets. OHM is supported by at least 1 DAI, meaning that if OHM is being traded at less than 1 DAI, it buys and burns its token, and if above 1 DAI, it mints more OHM.
Users can either stake OHM to receive absurd APYs or, in other words, “mint” or “bond” OHM at a discount by depositing other assets.
How can other projects take advantage of this PCA-accumulating mechanic?
Recently, OlympusDAO offered a new product on their platform called Olympus Pro, where different LP tokens from partnering protocols can be deposited in exchange for a specific token at a lower price than its current market price.
If ALCX-ETH SLP is deposited, the depositor receives discounted ALCX. Therefore, if Alchemix (with its token ALCX) is the depositor, they now claim the trading fees from the ALCX-ETH pool2 on Sushi. In this manner, Alchemix monetizes its own liquidity.
Another new project focused on solving the mercenary liquidity issues in DeFi is Tokemak. The protocol just hit 1B TVL (total value locked), and it is on track to start releasing liquidity to all of DeFi.
Through its “reactors,” Tokemak functions based on two main actors: liquidity providers (LPs) and liquidity directors (LDs).
LPs can add single-sided liquidity to a given reactor while TOKE (Tokemak’s token) holders stake their TOKE on the other side of the reactor. By staking, LDs direct the liquidity toward the project whose token resides on the opposite side of the reactor. Since many reactors will be supported, APYs will vary depending on how much liquidity is being provided on each side of the reactors. It is a balancing game between reactor sides and where to direct liquidity.
Following this logic, projects with liquidity directed towards them do not face the risk of impermanent loss; instead, LDs bear that risk.
In summary, OlympusDAO provides a way for protocols to own their liquidity while increasing its treasuries and giving out high and sustaining yields on their token. Tokemak allows projects to “rent” their liquidity without suffering from risks that come with interacting with pool2s.
These are just two very early-stage projects that might contribute to a complete shift in the way projects manage their liquidity and, consequently, their chances of success in the long run.
Who knows what next summer might bring.