On 24th April 2021, at 9:00 PM (UTC+8), another bilingual(English&Chinese) sharing event started in the Cycan community.
The following is the recap of this sharing activity.
Q1. Why do we need liquidity mining?
- The Needs of the Kick-off from the Scratch
DeFi models such as decentralized exchanges, decentralized lending, and decentralized stablecoin have their thresholds to newcomers. How to motivate users to participate in them requires certain incentive mechanisms. Hence, before the emergence of liquidity mining mechanisms, the DeFi market was so small.
2. The Needs for User Behavior Guidance
The essence of liquidity mining is an incentive for user transaction behaviors. It can encourage users to execute the DeFi contracts that we want users to achieve through artful designs, and then cultivate user habits.
So we can say that liquidity mining is the cause of the prosperity of today’s DeFi market. Without liquidity mining, the DeFi market would not be popular as now. Liquidity mining is the engine of the Defi market.
Q2. The classification of liquidity mining
1. Decentralized Transaction Liquidity Mining
Decentralized transaction liquidity mining is a process in which users can obtain token rewards by adding liquidity to the DEX liquidity pool. For example, SushiSwap uses the liquidity mining mechanism as an incentive based on Uniswap, accumulating a large number of users within a month. The core purpose of decentralized transaction liquidity mining is to stimulate users to add trading pair liquidity to the liquidity pool, continuously reduce transaction pair slippage, achieve a better transaction experience, and cultivate the habits of users participating in decentralized transactions.
For example, the current ELP-DOT DEX liquidity mining has escalated the rapid expansion of the liquidity pool, and the rapid drop in trading slippage greatly enhanced the liquidity of ELP trading, laying a good foundation for the expansion of ELP application scenarios.
2.Decentralized Lending Mining
Decentralized lending is the process by which users can deposit or lend digital assets with decentralized lending contracts to obtain token rewards.
The core purpose is: to encourage users to provide more digital assets to the loan contract so that the project can achieve the large-scale operation with the loan contract.
The price fluctuation risk of participating in decentralized lending contracts is relatively low (the major risk is contract risks such as instant loans), and it is also the earliest liquidity mining model that sets off a trend. The APY of COMP was once as high as above 1000%.
For example, the mining mechanism of ELC reserve pool can be regarded as a decentralized lending type of liquidity mining mechanism.
3.HODL Type of Liquidity Mining
HODL type of liquidity mining means that users get token rewards when they hold a certain type of digital currency, usually the mother currency of a certain project, and the holder of the mother currency gets the derivative currency airdrops during the operation of the project.
The core purpose is to encourage investors to hold the coin continuously.
For instance, holding ELP to get CYN airdrops. Note that all ELP held and ELP participated in various liquidity mining can get CYN airdrops.
In addition, no matter how many ELPs you hold, you can get CYN airdrops equally.
In views of ELC Risk Reserves and Ecological Funds, etc. do not participate in liquidity mining, only 7 to 8 million ELPs actually participate in liquidity mining, and on the other hand, 10 million CYNs are prepared for airdropping. and each ELP can get more than 1 CYN on average.
Transaction mining is the earliest liquidity mining model, that is, token rewards can be obtained by participating in transactions. This model is very simple and easy to use, but it often leads to the behavior of Click Farming. It has been proven that will cause great harm to the token economy and has been gradually abandoned.
Fcoin once has a typical transaction mining mechanism, and it collapsed. Most transaction mining cannot be mathematically proven to be reasonable and it will eventually collapse. Cycan Ecosystem initiated a time-series-based micro reward mining mechanism, which can be regarded as transaction mining, the details are as below:
The Cycan/ELP ecosystem has been equipped with all forms of liquidity mining mechanisms, and it is likely to become the king of liquidity mining in the future.
Q3: How to evaluate the risks of liquidity mining?
1. Price Fluctuation Risks[Impermanent Loss]
The price fluctuation of the LP token will cause liquidity mining behavior to be at risk, so you must pay full attention to price risks when participating in liquidity mining. It is possible to get a lot of shitcoins with zero value but put in a lot of valuable assets. Hence, the higher percentage of the stablecoin takes, the lower the risks, the higher percentage of the mainstream currencies, the lower the risks, and the higher percentage of the non-mainstream currencies, the higher the risks. Of course, high risks are often accompanied by high returns.
So we can say that the price fluctuation risk of participating in ELP-DOT liquidity mining is relatively greater at this stage. Hence, It means more for community members who are optimistic about the prospect of ELP and DOT in a long run. In the future, liquidity mining (Airdrop CYN) for ELC-USDT trading pairs will be launched, which is liquidity mining with a very low risk for sure.
Contract risk includes technical risks and mechanism risks.
The main technical risk is the contract code security, which may cause the entire system to crash once it occurs.
Mechanism risks are mainly the design flaws of decentralized financial mechanisms, such as using the “Instant Loans” to attack the DeFi contracts with the flawed oracle mechanism or attacking the stablecoin system due to flawed mechanisms.
Technical risks are mainly prevented through strict internal&external audits and prudent deployment strategies.
The mechanism risk can be prevented through repeated calculation of economic models. However, the prevention of Instant Loans may lead to higher transaction costs thus forming an obstacle to promote the DeFi tools.
3. Giant Whale Risks
The great token holders participate in liquidity mining and quickly sell off the market after obtaining a large number of tokens, which often causes great harm to the DeFi project. When designing a liquidity mining mechanism for DeFi projects, certain restrictions on the participation of these great token holders must be considered.
Hence, when investors started to participate in liquidity mining, a comprehensive assessment of the long-term value, open-source code and operation mechanism have to be conducted, In the future, professional decentralized funds for liquidity mining will inevitably appear in large numbers.
We have to pay attention to these three major risks.
For the ELP, the coin addresses are fairly diffused, and there are no external giant whales buying a huge amount of tokens. For the sake of risk control, we did not conduct large-scale publicity and promotion but chose the basic community to continuously strengthen consensus and share early-stage benefits.
In the DeFi market, the priority we have to consider is always the risks instead of the benefits.
You know, there were lots of Liquidity mining on Heco that were mined and mined, and finally collapsed….
Q4: What are the advantages of liquidity mining?
1. Reward in time to promote traffic concentration;
2. Lock the liquidity of tokens and stabilize the price of tokens;
3. Let the tokens be distributed as much as possible to a large number of retailed investors participating in ecosystem construction.
The real-time rewards mechanism is very important. When you participate in ELP mining, isn’t it very happy to see that the profit increases every minute?
In the early stage, we recommended that everyone should buy a small amount of ELP(Like 10 tokens), the first is to control the risks, and the other is to form a sufficiently diversified token distribution. In the future, various mechanisms of ELP will be designed and tried best to favor retailed investors and restrain the giant whales.
Q5, What is liquidity mining based on time series.
The essence is “consumers are the shareholders”. The Bancor mechanism is used to recognize the value of early participation. The earlier you participate, the greater the profit your will get. At the same time, the mining mechanism uses the Bancor mechanism, and the transaction uses the AMM mechanism to create the price difference between the primary and secondary markets, which is conducive to promoting more consumption and drive business development.
For example, if you invest in a fund of a well-known fund manager via the Cycan protocol, the airdropped tokens you will receive makes you the shareholder of this manager’s fund, This is a completely different experience.
In the future, high-quality DeFi projects will inevitably have a wide variety of liquidity mining mechanisms, which will, in turn, make the whole token economy develop in a balanced way; at the same time, DeFi investors will participate in various liquidity mining according to their diverse needs and capture various chances of profit. Liquidity mining will play the role of the engine for a long time in the DeFi world.
In general, a project has only one or two liquidity mechanisms, while our projects have five to seven types. It will result in a shortage of tokens, a surge in traffic, and a soar in price.
The core liquidity mining mechanism of Cycan is decentralized funds liquidity mining, which attracts a large number of investors and industry insiders to participate in the Cycan ecosystem.
David, the CEO of WiseKey, listed on NASDAQ, has confirmed as a partner of Cycan and we will reach comprehensive and in-depth cooperation on NFT business on the ELP platform.
The Cycan(CYN) is a decentralized cross-chain asset management platform to provide users with convenient asset management tools and diverse investment strategies to achieve the value growth of their digital asset portfolios. Cycan will be focusing on the DeFi market.
The Everlasting Parachain(ELP), as the canary network of the Cycan Network, is a decentralized cross-chain asset management platform with the same features as Cycan but focusing on the NFT market.
The Everlasting Cash(ELC) is an anti-inflation algorithmic stablecoin on the Cycan network.
ELP BSC Contract Address: 0xe3894cb9e92ca78524fb6a30ff072fa5e533c162
W3F Grant of ELC: https://github.com/w3f/Open-Grants-Program/blob/9015e4c7fab9dc32a9a8f9c1f63eb0ffcb961380/applications/EverlastingCash.md