Understanding the Three Major Liquidity Solutions: Olympus, Tokemak, and Fei & Ondo
Project parties and investors are increasingly aware of the harm that liquidity mining can cause to the long-term development of projects and are seeking solutions.Author: Joey Santoro, Founder of Fei Protocol
Original Title: 《New Approaches to Liquidity in DeFi》
Translated by: Hu Tao, Chain Catcher
Increasing liquidity is one of the main goals of any developed financial market. Essentially, "I want to make this trade as cheap as possible, I need liquidity on the other side." This applies not only to trading tokens but also to lending, derivatives, and structured products.
For young DeFi projects, liquidity is especially important. They want new users and stakers to grow with them as they enter the market.
This article showcases how DeFi has addressed liquidity issues in the past and how projects like Fei, Ondo Finance, OlympusDAO, and Tokemak are tackling it in the next wave of DeFi.
Liquidity Mining and Employed Capital
A major catalyst for DeFi was Compound's introduction of COMP tokens to the suppliers and borrowers in its lending market. This was the first "liquidity mining" initiative—exchanging project ownership for temporary liquidity.
The problem is that liquidity mining is both expensive and costly.
From a consumer's perspective, "yield farming" is an optimal strategy that shifts funds to where liquidity mining rewards are the highest. However, this also leads to a tendency for capital to leave immediately after rewards end, and additionally, a slow bleed effect occurs as tokens are continuously dumped into the market. It is well-known that competition is great for consumers but challenging for businesses (protocols). Competition also encourages innovation, which we will see later in this article.
Even with high costs, guiding a user base has never been an easy task. The summer of 2020 saw a surge in DeFi development. New projects could instantly amass billions in TVL by launching a token and giving away 10-50% of it. Driven by innovative plays like yield farming, new DeFi projects experienced a Cambrian explosion.
However, this phenomenon is unsustainable. Project teams and investors are increasingly aware of the harm liquidity mining can cause to a project's long-term development and are seeking solutions.
New Approaches to Increasing Liquidity
How to address the issues of employed capital is also a component of DeFi's future development, recently referred to as DeFi 2.0. These new protocols are positioned higher in the DeFi stack. They can leverage the scale and network effects of underlying DeFi protocols to solve liquidity issues and achieve greater market efficiency.
Previously, project teams had to pay high fees to employ liquidity; now they can take the following actions:
Directly purchase their liquidity
Rent from protocols that can provide the cheapest and highest quality liquidity
The former method is known as protocol-controlled liquidity (or protocol-controlled value, protocol-controlled assets). For example, Fei Protocol, OlympusDAO, and Frax Finance are supported by this method, with their tokens having extremely high liquidity per unit of TVL.
The latter method of renting liquidity is known as Liquidity as a Service (LaaS). When provided by dedicated protocols (such as Fei and Tokemak), LaaS can be very efficient.
Note: There are many ways to address the employed capital issue, including options and locking. This article focuses only on a few methods from popular projects.
Liquidity Owned Through the Olympus Pro Protocol
Olympus Pro provides projects with the opportunity to obtain liquidity for their own protocols by leveraging the OlympusDAO bonding mechanism. Project teams can exchange their tokens at a discount for any type of LP token or underlying asset they desire. This is a significant improvement over traditional liquidity mining, where project teams could not retain any liquidity from employed capital.
The underlying tokens in Olympus Pro bonds do not need to have any relation to OHM tokens, but projects can pair with OHM or sOHM to access the OlympusDAO ecosystem.
Traditional liquidity mining requires high upfront costs with no returns. Olympus Pro disrupts the cost of liquidity mining rewards by shifting the burden of the protocol to more sustainable protocol-owned liquidity. Here, the protocol can use native tokens to permanently acquire liquidity without worrying about losses.
For projects that only want liquidity but do not need to fully own it, they can explore alternative leasing methods to traditional liquidity mining programs (such as Tokemak and Fei).
Sustainable Liquidity with Tokemak
Tokemak introduces a Liquidity as a Service approach. Tokemak allows projects to provide a single token to the token pool reactor, which is then paired with underlying assets like ETH, USDC, etc., and potentially FEI in the future. TOKE holders direct this liquidity to where it is most needed and compensate for any impermanent losses incurred by the project.
This assurance brings significant benefits to depositors. Tokemak accumulates assets through trading fees. This ultimately enhances its ability to provide sustainable liquidity. Initially, TOKE was issued as a reward for users, and TOKE holders eventually gain ownership of Tokemak's Protocol Controlled Assets (PCA).
The TOKE tokenomics encourages long-term, value-driven participants to enter the network. By acquiring a share of TOKE, project teams can direct their liquidity to any place they need. As a preliminary investment for the project, this method is far superior to traditional liquidity mining.
For projects seeking long-term sustainable liquidity, the best approach is to acquire TOKE shares and seed the Tokemak reactor. In the liquidity market, they can use TOKE to pair with any project token they support, without the risk of permanent loss. The Tokemak CoRE2 voting event will begin on November 1.
Liquidity as a Service (LaaS) through Fei and Ondo
Fei Protocol supports FEI, a fully decentralized and scalable stablecoin backed by on-chain reserves. Fei can use its PCV to support liquidity supply priced in FEI as the base.
Fei Protocol is collaborating with Ondo Finance to provide a cost-effective and flexible-term LaaS product. Essentially, project teams can deposit their project tokens into a flexible-term Ondo liquidity vault, and Fei Protocol will match their deposits with an equal amount of newly minted FEI, with tokens paired under the automated market maker trading mechanisms of decentralized exchanges like Uniswap or SushiSwap.
Essentially, Fei Protocol can double the liquidity of a project and eliminate all upfront capital costs. At the end of the window period, the vault will return the FEI and all remaining tokens to the project, plus a small fixed fee.
The Ondo Vault handles all the accounting work behind the scenes, retaining all transaction fees and any impermanent losses incurred.
Fei's Liquidity as a Service (LaaS) is a fast and inexpensive way for projects to acquire liquidity priced in dollars.
Conclusion
Project teams now have multiple options, whether to invest in protocol-owned liquidity through Olympus Pro, invest in long-term value-aligned liquidity through Tokemak, or invest in cost-effective Liquidity as a Service through Fei and Ondo.
These products represent significant improvements over traditional liquidity mining projects, and we expect new projects to turn to products tailored to their needs at different stages of growth.
