Revolutionizing Liquidity with DeFi: A New Era of Liquidity Mining and Automated Market Making
In the realm of DeFi, liquidity is a metric used to determine the ease of buying and selling an asset on a market. High liquidity indicates that an asset can be traded in large volumes without significant price impact, while low liquidity means that large trades can move the price considerably.
The Liquidity Dilemma
Liquidity provisioning can be a costly affair and it usually makes up a substantial portion of a protocol’s balance sheet. In DeFi, liquidity is supplied by Liquidity Providers (LPs) who receive a share of the trading fees as a reward for their liquidity provision services. However, LPs usually demand high returns, which are often given in the form of governance or incentive tokens from the protocols in search of liquidity.
Typically, new or untested projects have to pay more for liquidity as it involves increased risk. To attract liquidity, such projects may have to offer high rewards to LPs to persuade them to provide liquidity to their markets. This cost can be substantial for the project and can reduce its profits. Liquidity provision might not be the core focus of a protocol, yet it may still need to spend significantly on it.
Furthermore, in DeFi, there is fierce competition among projects to attract liquidity, which may result in higher costs to incentivize liquidity providers (LPs) through various means, such as incentives or bribes. This intense competition for liquidity may force less established projects to offer higher rewards to LPs, making it more challenging and expensive to attract liquidity. Thus, the cost of liquidity remains a significant expense for DeFi projects, and it may impact their profitability and sustainability.
The Volume Dilemma
DEXs thrive on volume, which translates to trading activity and revenue generated through trading fees. High volume indicates a healthy and sustainable exchange with a large user base.
In the past year, the DEX landscape has witnessed “fee wars,” where DEXs competitively reduce their trading fees to attract more volume, leading to downward pressure on fees and affecting revenue generation. Today, most trades go through aggregators that route trades based on the lowest fees, forcing DEXs to either offer lower fees or find alternative ways to attract users.
Dubble DEX aims to address this issue and introduce a new approach to liquidity provision.