Designing a Sustainable Ecosystem Liquidity Program

Transcript

hey everyone my name is kendall i'm a founder of a company called proximity that builds defy applications on the near blockchain and we are going to chat a bit about designing a sustainable ecosystem program so just heads up on what we're going to cover so first we're going to touch on how new ecosystems emerge on l1s and l2s we're going to cover the types of ecosystem programs and how they can accelerate development along with some advantages and disadvantages of each of them and then finally we're gonna touch on how to make them sustainable so first off uh what makes a healthy d5 ecosystem another heads up this will be mainly focused on defy ecosystems so

there's three major components certainly many more things but capital core components and primitives and liquidity so what do we mean by capital by capital i'm talking about valuable assets that are available on chain uh so at a very at a minimum and bitcoin is probably the best example of this you need a liquid based token so obviously the base token bitcoin that's pretty much you know the entirety of that protocol and the most of this capitalization actually happens off chain so you can trade bitcoin on centralized liquid exchanges and essentially what you can do is look at the total market capitalization of that chain based on the market capitalization

of bitcoin obviously with something like ethereum it gets way more interesting because you can issue an infinite number of assets and you can have markets both on chain and off chain i think what's interesting to point out here about ethereum and most of you probably know this but the ico boom was really what kicked off and played a major role in the capitalization of ethereum you know prior to the ico boom all you had was ethereum as the as the asset that was on chain and post ico boom you have now you know thousands of assets and also way more interesting sort of capital formation structures on newer l1s what we've pretty much seen is the vast majority of this capital actually comes from bridges to ethereum

and now we're starting to see these bridges go between these new l1s and l2s which allows you know new sort of bootstrapping uh protocols to tap into the capital markets that exists on various chains was still primarily ethereum uh so the second major you know component of a aspect of a healthy d5 ecosystem is the core components so there's two sort of major frames of core components as i see it so you have primitives um the best thing to think about here is sort of a token standard you know something like the fungible and non-fungible token standards that exist on ethereum and then you know getting a little bit more like in depth and closer to an application is something like a you know multi-signature wallet or account you

can even throw a sort of dow framework so like the idea of dials and how they can operate in here as a primitive as well and then you have these minimum viable components and applications that are critical for these healthy ecosystems so just a few examples here you have dexes oracles which enable you know lending protocols derivatives all these like longer tail you know interesting sort of like higher level solutions and then as we mentioned before bridges are you know easily one of the most important core components for new chains so on to liquidity so we talked about capital and how a capital can actually just you know be based on the value of assets with off chain exchanges for a healthy d5 ecosystem you need liquidity to exist on chain at least if you want to get anywhere

near ethereum's level of success so i think there's sort of two eras here so far and there's going to be many more as to what your strategies that are available when it comes to attracting liquidity so you have kind of the pre-synthetics snx token uh liquidity mining strategy and comp uh and your options there you could have you know provided your own liquidity on uniswap you could be listed on a centralized exchange you could work with market makers and you know use them in tandem with providing your own liquidity or list in a centralized exchange all these very expensive or you could do an initial dex offering um which you know again very expensive and capital intensive for the core team who usually have to put up you know their base token and then um usdt or ether or some other

part of the pair once we have the you know the sort of creation of liquidity mining by the synthetics team and then getting popularized by the compound team things start to get more interesting um so you have you know liquidity mining basically just giving away your token to incentivize uh more people to to put liquidity into your token usually you're on the decks uh the idea of a pool two which is usually your base token and then and then you know ethereum or another token you actually put the highest amount of rewards into that pair because you're expecting it to be a little bit volatile more recently we've seen the olympus ohm style bond which is actually where protocols are buying their own liquidity which is kind of a fascinating development and the one that we're

actually going to cover in a little bit more detail here is this brand new idea of sort of liquidity as a service so if the ohm style bond is a protocol buying liquidity where you're actually kind of purchasing the lp token as a protocol that you could own permanently liquidity as a service offered by projects like tokamak and fey and ondo is more like renting liquidity we'll talk about kind of how you can do that so yeah like those are sort of the three major components of um of a healthy ecosystem now how do you sort of how do you sort of accelerate the development of those three major components so there's a few different types of ecosystem programs i think the common theme is that the goal really is to to accelerate those three different things

that you're aiming for and the different types that are available to you you have grants liquidity mining rewards programs that liquidity as a service we talked about and ecosystem dials so what are grants programs that's probably the simplest one the one just about everybody is familiar with high level it's providing some kind of equity free grant to a team or an individual to deliver some kind of project or component usually these range around 1k to 20k in some extreme cases they can be as high as several million but usually they're like much smaller amount all those are kind of starting to trend upwards these are especially useful for public goods just kind of the nature of them you know you're the only expectation is that they sort of deliver usually this

sort of open source component or this open source sort of project um it's a little bit less suitable for something that's you know intended to generate revenue the ethereum foundation used this in a big way with unit swap and uh even more interestingly their e2 clients you know pretty successful there but what are the disadvantages so these are oftentimes difficult to manage grants programs can have a high overhead if you want to make sure that they're successful then you should be having some kind of milestone set up with a team some kind of regular check-ins uh and if you don't do that then they can be unreliable you know teams might kind of you know miss milestones they might disappear they might just lose interest sort of related to this a lot of times

grants are not particularly sustainable for many teams you know like grants are usually milestone based so that might only get them to some part of their project you know if they if they aren't ready to raise funding or if it is a public good and that's not even really a suitable option for them they're going to have to reapply to grants and sort of you know go through this process over and over not necessarily a great option and then oftentimes if you are a revenue generating project something like a grant is unsuitable now at neuro we actually have used this for for projects that have those ambitions as long as they are interested in uh making and making their project open source so that's not necessarily a blocker but usually usually not the best approach so this program has gotten super popular lately the liquidity mining program and

we're talking about at an ecosystem level so this is basically where you're supplementing the lower level project protocol level strategies like ave for instance or compound with the base token from the new layer 1 or layer 2. polygon was the first one to implement this and did so quite successfully they you know really accelerated the growth of their ecosystem and attracted a lot of capital through this more recently we've seen avalanche come out with a similar program uh and and and you know attempt to replicate that success the biggest benefit of a liquidity program is that it provides a strong incentive to move capital so usually there's going to be some sort of cost to users either in time in you know gas fees on the base layer and the

new chain and then just opportunity cost uh from those two things so they need some sort of really strong pull in order to actually use the bridge in order to try out these new protocols in order to really you know connect with your with your your chain and so um yeah that's a really important part of the liquidity liquidity program and then i think most interesting actually is this can kind of provide a boon for these these newer projects these projects that aren't yet ready to launch their own token or maybe never want to launch a token but they're looking for these initial users when you have an ecosystem-wide liquidity program that can give these newer projects an opportunity to to you know get users to test out their model and test out their new flow without having to you know consider

their own token the disadvantage is there are quite a few here i think you know it's very expensive to do these programs you are pretty much directly paying for some amount of capital for some amount of time if you look at the size of these programs at the ecosystem of why level they've been in the hundreds of millions of dollars certainly not cheap uh there certainly are some regulatory considerations i mean we haven't really seen much clarity yet on like how regulators are going to treat these programs but that gray area you know does make things a little bit a little bit you know concerning um there definitely are diminishing returns here and that's part of this being expensive you know like you can throw a lot of capital at these projects and eventually there's sort of a max amount even with a really high apy

of the capital you're going to be able to attract and oftentimes this capital that you do attract will move to another chain another protocol the second that your ap your sort of level of return isn't the highest and that sort of leads these not really being the most community-oriented strategies so rewards programs are kind of an interesting alternative or even ad value-add to liquidity programs uh this is actually discussed a little bit in the previous talk by the uma guys this is where you can you know reward teams or even individuals tokens based on some kpis some metrics that that they're they're going to hit two really good examples of this so block stack started this with their app mining program this is basically where they put up some essentially a bounty for new teams to

build apps that were built like deploy apps to block stacks blockchain phantom has done this more recently and then what they do is they actually base it on the the total value locked so like the amount of assets that each individual team or project is able to attract to the phantom chain and they give away their third data token to these teams what's nice about these programs is they are a little bit more open usually you set some some strict rules on you know what does it take to qualify and then you know there's no necessary like pre-existing relationship there's no bd that's really required it's sort of like you say hey look we put this up we did this it's verifiable on chain and then you get the reward whereas usually these liquidity programs involve you know some kind of

discussion between the two teams about what's or at least two dollars about what's going to work out you know best to achieve the goals the drawbacks here being that any time you have you know a program that's sort of set in stone that has some clear rules it is potentially gameable uh and you know it's sort of this what's called like an infinite game where you know you you set up like one set of rules they get gamed and you set up another set of rules and it just continues to get gamed i mean this is something that you know led to block stack to can their their app binding program um we'll see how effective it is on on phantom uh so yeah related to that they're usually not very strategic and a lot of times these are used more successfully for teams than

for users so you're not necessarily going to attract capital unless the team figures out a way to uh you know like pass on these games that they make to their end users so here's we get into some of the newer newer types of programs you can do this previous three have been used for a while now i think that this is going to be sort of the next wave of what we see for these programs and get into how we can make them more sustainable um so like we mentioned before this liquidity as a service this is where you're kind of renting liquidity is a really interesting idea it's being used for the individual project but is yet to be used ecosystem-wide so if you use your base token as a new ecosystem say that's near say that's avalanche what you can do is you can actually make it so that your

community and your holders can provide liquidity to newer projects that are trying to bootstrap their own liquidity without needing to acquire another token so that's called single-sided liquidity provision some projects that sort of enable this the tokamak ondo and fey um they allow you to you basically yeah do this renting liquidity and this this basically just minimizes the risk for your community and also allows them to you know stay invested in your base token and you're in your main asset layer while also providing uh support to these newer projects that are launching a key benefit of this is it's actually you know relatively cheap as compared to you know just giving away the tokens in a liquidity mining strategy which you know at least in theory makes this a little bit more long-term sustainable

you're not you're not really going to run out of tokens at least not very easily the biggest drawback here is that it's not quite ready yet uh we're going to see you know on ethereum tokamak launch i think in the next couple of weeks there i mean they have aspects of the program live but they're going to launch the actual like liquidity provision pretty soon and then onto and fair trying this out in like a smaller level but uh you know i think we'll see will that develop over the next couple of months as well uh i think the second major way that you can enhance those other programs that we talked about is by making them into adapt what are the benefits of this well you make it way more community driven you potentially diminish regulatory risk and you give your

you know the key players in your ecosystem a way to really uh you know direct the the sort of evolution of your chain and also like back other key players uh on your team so i think you know a good way to do this is you start with just the core ecosystem representatives and then over time you can broaden this and to be way more of a community driven program you know it does allow you to set up a really clear transparent process for teams and participants as opposed to some of these other programs that are less transparent and then potentially you can actually achieve some regulatory advantages too uh by you know not having any sort of like clear domicile through which this has been done it's going to be way more distributed as far as the control of this program

and you know you might reach that sufficiently decentralized moniker that a lot of regulators have been throwing around recently all right so wrapping up here you know thinking about all this we just talked about you know how do we wrap this into a path to sustainability for these ecosystem programs i think the most important and high level takeaway here is that you should combine elements of these grants programs the rewards and the liquidity programs and aim to distribute them via dows what are the advantages of doing so this will help you attract quality teams and projects uh you can create early winners that reinvest in the ecosystem this is sort of the wealth effect that a lot of people talk about you have these early teams these early individuals that do well with certain projects and then they

want to reinvest in the ecosystem and create more winners and attract more teams um it makes it easier to keep this capital and liquidity on chain you know if you have a clear process and also like a sustainable buy a liquidity as a service type of type of approach then you know you you don't just have mercenary capital come in through the you know six month duration of your ecosystem live liquidity mining program you have sort of a path to you know repeating this process over and over again uh ideally for you know years or even longer and most importantly you give the community a voice and also eventual ownership over these different programs all right uh well yeah thanks everyone this is uh if you are interested in

learning more about nearer proximity and how we might implement some of these ideas you can follow us at proximity.phi on on twitter or you can follow me at kendallcool