Author: FC, Partner at SevenX Ventures Source: X, @FC_0X0
Is the DeFi craze coming back? It's time to get ready.
This is the "on-chain mining secret" summarized by three "DeFi Summer big winners" over two cycles. It clearly explains "how to choose the target" and "what issues you should be concerned about".
Why is the on-chain mining growth in this cycle so sluggish?
Smrti Lab co-founder 0x992 @0x992eth has been following and participating in DeFi since 2018, and started becoming a Liquidity Provider during the DeFi Summer of 2020, while also establishing his own DeFi Fund.
He believes that the core of the 2020 cycle was the spillover of liquidity from the DeFi Summer, with nearly 800 token-issuing projects, and almost 2 new projects being listed every day during those two years.
However, this cycle's so-called "Point Summer" has a very obvious problem, which is that people don't dare to do real Token Generation, and they haven't figured out what the four-year unlocked tokens are supposed to incentivize, and haven't figured out how to maintain a four-year effective innovation as a bribe or vToken.
He also mentioned that the concept of returns in the Point Summer is rather vague, with the core problem being the lack of buying power liquidity, manifested in two aspects: 1) inability to find periodic returns 2) lack of DeFi Lego innovation, unable to attract new users
In his personal view, Liquid Staking is actually a field that is very much in line with market demand and has the potential for cash flow and TVL growth, but the key is how to unlock the income mechanism to continuously drive the prosperity of the market.
Can there be another "DeFi Summer"?
Jimmy @0xJimmyYin started out as a Dapp developer, later worked on a DEX, and in 2020 founded iZUMi Finance, focusing on providing LaaS (Liquidity-as-a-Service) and multi-faceted services including liquidity for projects in the multi-chain ecosystem.
Jimmy mentioned that in the previous market cycle, a large amount of off-chain liquidity was distributed layer by layer through the complex design of Tokenomics, creating a huge wealth effect and attracting a steady stream of new players, with many MMs transferring a lot of centralized strategy funds to operate on-chain. The current popular trend, however, is to move on-chain funds back to centralized platforms for RWA operations, reflecting the lack of on-chain returns.
Jimmy believes that the previous round of DeFi has left a significant value for the entire financial field, and the real user demand still exists. For example, some projects have not issued tokens, but have still created real use cases through interest rate arbitrage incentives.
If the current market can maintain stability, the influx of new capital will not be in vain, but if some projects ultimately go to zero, lacking real business and alternative value, it will be difficult to rekindle user interest in the future.
Therefore, whether product innovation can reach the level of the previous round of DeFi will be a key factor in determining the future value of these "Paper Money".
How to choose the timing and targets for mining?
Peg @0xNeoSu has been an angel investor since 2018 and founded Arcane Group in 2011.
Peg believes that the essence of on-chain mining is to create trading liquidity and TVL for DeFi projects and help them with cold start.
There are two stages that on-chain mining should participate in the most: 1) the cold start stage 2) the mid-to-late stage, i.e. the stage where the Token has a clear use case and certainty.
The intermediate stage, i.e. the period when the project has just issued tokens and completed the incentives, is usually the most difficult. In this stage, investors need to pay attention to the project's long-term planning, how the Token incentives help the ecosystem, and whether the project's business model can support the 4-year unlocking period.
When evaluating which projects are worth participating in mining, Peg emphasized two key factors: 1) the diversity of revenue sources and the richness of the protocol 2) the project's ceiling should be high enough, i.e. whether the project has quality endorsements, resources and liquidity providers (LPs), which directly affect the project's valuation and long-term development potential.
Peg mentioned Berachain, saying it is a project that has performed well in terms of liquidity. Their Points model clearly informs users how much token they can ultimately get, while many LRT projects have issues, often only giving points without clear token distribution rules or income models.
As a liquidity provider, what should you be concerned about?
0x992 believes that for Liquidity Providers, their core concerns are:
1) How much return they can get from the project at the end of the investment period. The transparency and certainty of this outcome is key to the success of the project, whether it is BTC-based LP or other forms of LP, they will focus on the ratio of assets invested and assets recovered.
2) Strategy transparency is one of the important criteria for ensuring returns. LPs need to be clear about how the funds are operated, especially when multiple strategies are executed, understanding when and what kind of returns each part of the funds will generate is crucial.
3) Liquidity and strategy capacity not only need to consider (such as APY or APR), but also need to focus on the liquidity of the assets, especially when the market is volatile or there is a large-scale capital withdrawal, whether the ability to quickly withdraw assets. Liquidity management and strategy capacity can protect investor funds in extreme market conditions and prevent "black swan" events.
Ultimately, all judgments boil down to one core issue: the return rate of the token position. No matter how the project side promotes complex yield indicators (such as DPI, APY, etc.), LPs are always most concerned about how much BTC, ETH or other crypto assets they can get back. The above factors, actual returns, liquidity and transparency, are the cornerstone of long-term success for DeFi Farmers and project parties.
Where do the returns from on-chain mining actually come from?
Jimmy explained that the sources of returns are mainly divided into two categories: transaction fees and yield farming.
The participants in transaction fees are divided into three categories based on their motives: 1) ordinary users who pay gas fees 2) suppliers or trading bots that arbitrage the time difference between on-chain and off-chain information 3) wool-picking parties or scientists who obtain airdrop rewards through on-chain transactions
Yield farming is typically represented by lending protocols. There are two main forms: 1) the early lending returns of BTC and ETH 2) the staking returns after Ethereum's transition to PoS. For example, Lido will allocate 10% of the returns to the protocol to support the underlying real returns. In addition, projects like Blast, Manta and Merlin also provide yields based on single-token staking, where you just need to deposit the assets to get the returns.
At the same time, he also pointed out that the real returns from off-chain sources, such as USDM and the Federal Reserve, as well as the returns of CeDeFi market makers, are also important supplements.
Peg believes that the real returns of DeFi projects mainly come in two forms: one is single-token interest, and the other is the value correspondence between the same assets.
Popular assets are usually BTC vs BTC or ETH vs ETH combinations, because there is no trading difference between these assets, thereby avoiding the interference of contract risks and other external complex factors.
He pointed out that how to effectively increase the token value through the "swimming pool" is a challenge, although the liquidity may not fluctuate every day, but when major events occur in the protocol, the asset prices may experience significant growth. Therefore, investors hope that the assets they hold are not only safe, but also have the potential for long-term holding.
The road of trading is lonely, I hope I can help everyone find like-minded partners, see you at the next event.
