Hasu & Kain Warwick: Diving Deep Into Liqudity Mining #370

Transcript

this is epicenter episode 370 with guests Kane Warwick and [Music] hzu hi I'm Sebastian and you're listening to epicenter the podcast where we interview crypto Founders Builders and thought leaders on this show we dive deep to learn how things work at a technical level and we fly high to understand Visionary Concepts and long-term trends if you like epicenter the best way to support us is to leave a review on Apple podcast and if you're on a Mac or iOS device the easiest way to do that is to go to epicenter.com about Defi and crypto he also hosts a

podcast called Uncommon Core so in this episode sunny and frica speak with our guests about liquidity mining uh we were going to do this episode earlier on the year but for different reasons it's only happening now but I think that you know having a little bit of distance from The Surge uh that happened in this last summer actually makes for a much better conversation than if we had ended up recording it right in the middle of the boom so this is a really information dense episode I listened to it once I think I'm going to have to listen to it again to really grasp everything that was discussed here but some of the things they talked about were you know the history of liquidity mining how it started uh where it sits relative to other cryptoeconomic incentive mechanisms like Mining and staking how value flows uh things like impermanent

loss and how the market could evolve one aspect which I thought was really interesting and I hadn't really considered before is who will own the customer relationship you know at the lower end of the stack we have amm and certainly it's possible to interact with them directly like anybody can go to Unis Swap and you know use uh the app directly but as you go up the stack you know there's other uh participants there that provide a lot of value for users as well so you have aggregators for example you have wallets and the question is who will own that relationship with the customer and I think that it's possible that most people will simply end up interacting with aggregators and their wallets and that amms and the kind of underlying infrastructure will end up becoming more of a utility more of a

commodity one of the aggregators that I really like is 1 in it's the leading Dex aggregator and it discovers the best trade prices across all dexes it's my go-to aggregator and I love that it shows me how much I'm saving in fees on every trade I'll tell you a little bit more about 1 in later on but if you want to check them out you can go to Epic center. 1in that's the number one and the letters in NCH if you build a lot of Wordpress websites like me one of the things that you'll probably find most timec consuming is frustrating is devops deployments maintenance backups and database management the folks at cpanel have built the WordPress toolkit for cpanel and it's a tool that makes it easy for you to manage your WordPress infrastructure I'll tell you a

little bit more about that later on but if you want to learn more right now you can go to epicenter.com I'll also tell you a little bit more about that later on but if you want to learn more right now you can go to alar.com epicenter for now though here's our conversation with Kane Warwick and hzu hi this is epicenter um and I'm Freda an and I'm Sunny urwal um today we're having a bit of a special episode in that it's not on any one particular project it's on liquidity

farming in general and we have two guests today Kane from synthetics who we've had on earlier this year as well and hzu maybe both of you guys can give a very brief introduction on your backgrounds and who you are Kane do you want to start uh yeah sure I'm the founder of synthetics uh which is a uh synthetic asset platform built on ethereum um so we allow people to get exposure to a range of different assets like gold silver oil Etc yeah I'm hu that's a pseudonym uh not my real name in case you wonder before crypto I used to play online poker professionally for 10 years I played pretty high stakes for a long

time but something that I increasingly Learned was that I enjoyed the the studying aspect of the game more than playing and basically discovering the hidden rules and strategies of the game and um and then teach that to others so when I was done with poker I looked for a space where I can apply that that same approach basically and um got very quickly sucked into crypto and I would assume you would all agree that crypto is like you have like a million strings around you and you can pull at any one of them um for years and um basically never never get to an end and um I think that's so fascinating about it so yeah I

basically do like research full time but I just do it for myself invest my own money and like for the last year or so I also run a research desk for der derit is U the largest options Exchange in the space so we write weekly um research columns um that's me and suzu of three arrows and um few months ago we also started podcast together called Uncommon Core so that's that's what I do pretty much and it's super interesting we'll link to it in the show notes so if you guys need uh more podcast fter I would totally recommend it cool so let's talk about liquidity mining so um the entrance of of liquidity mining has been somewhat gradual so basically if you

like look at the earliest instances of liquidity mining where and when do you think it you would say it it actually started I think my view is that there's been a few different iterations right but um certainly you know things like uh live Pier for example um you know were early iterations of uh of trying to work out how to do some mining like distribution uh that wasn't at a base layer right like you know something above the base layer that allowed you to distribute uh you know uh tokens or assets based on uh some you know provable you know piece of work that you're were

doing yeah I agree so um so one thing that basically I like when I first heard about liquidity Mining and that was actually not um when synthetics did it uh which did it was probably the moment when it went when when most people first heard about it but when compound did it this this year and it basically like hit the mainstream in a big way when I heard about liquidity mining I immediately thought okay this is basically um proof of work mining right this is basically like mining as we in Bitcoin or as we have it even improve of stake like Cosmos but in a more generalized way so in these Network like in networks like like Bitcoin or like even the deps they also like networks if you want to think about them this way

you have have different groups of actors and often like one group incentivizes the other to perform certain work for them and um yeah that's basically uh what we have in in Bitcoin right so in Bitcoin you have the users who want want to transact with each other want finality on their transactions and the way we get this is that the users pay miners to collect transactions in a block and then attest to them with a cryptographic proof of work and that proof of work is what creates finality over time because basically makes transaction history harder and more costly to reverse I I I like that you brought up life Pier because I also I wanted to go into that direction in terms of explaining it that

so it all started kind of with Bitcoin but then we already had back in the day like different um basically the the network incentivizing different things that were not just a testation of messages um for example we've had storage right so we've had like stuff like I don't know how to pronounce it Storage storage J and and then sa for example so that's where actors in the system are are paid to basically provide uh like store data and then provide proofs that the data exists and so on so the way I think about liquidity mining is basically is generalization of that concept as it relates to providing Financial

liquidity so in like storage and Saia it was mostly like other users paying other users for like storing of data would that still count in this like liquidity mining or does liquidity mining necessarily imply that it's some sort of new Supply that's being distributed I think for me it needs to be like a a protocol level incentive right that's that's designed to bootstrap you know before people are willing to pay right or like augmenting what people are willing to pay um maybe that's not strictly necessary right um you know could launch a network that immediately had sufficient Network effects that people were you know paying each other enough but at that point I

would say you almost don't need liquidity money you just have you know payments so I I do think there is a component of it that's like about generating those Network effects and and bootstrapping yeah I think that's a that's a good point I mean on the one end we like if if the Bitcoin the block subsidy would go away we wouldn't say Bitcoin no longer has mining right so it still has that aspect but the way that we talk about liquidity mining the way that it's used in in the public discourse is basically synonymous to to a subsidy that's that's basically supposed to create network effects early on I would agree so when I think about liquidity mining there's actually I mean obviously

network network effects and basically I would call that growth Marketing in the broadest sense and obviously they play an important role but there's also different aims here right right so basically there's programmatic decentralization um to a certain extent so basically you want a broad distribution of your token and uh an inclusive governance and uh you want I mean basically the entire Fair launch movement kind of grew out of this and you also ideally want close alignment between your own token holders and the people who use your protocol right because I mean if you if you look at the token distribution after the 2017 Ico bubble a lot of it was just for speculative purposes despite the fact

that almost all of these tokens were branded as utility tokens but people held them for speculative purposes is the core aim for you guys of liquidity mining is that growth marketing or does it have deeper ideological goals I think it has two very practical goals and um you basically touched on both of them the one is always to incentivize kind of the the provision of some work or to the network and that's and you you need that early on in two-sided marketplaces because the like for example on compound you won't get any borrowers unless you have lenders and vice versa then no lenders unless they are borrowers and that's why it's

important early on to bootstrap or to to kind of provide an additional subsidy Beyond just that the supply or the utility that you can already get but the second is the initial distribution of supply so you have this kind of fair launch theme right so de coins that had a fair launch Fair launch meaning that basically everyone had to pay to acquire the supply and everyone had to pay the same market price that's that's kind of the definition no no one get got any coins for free there's no pre-mine no VC allocation that basically that's that's the the fair launch and we've seen that again and again that coins that do have a fair launch get assigned a premium by

the market those coins are seen as more valuable their distributions are seen as more fair um moreal egalitarian and that's why more and more projects nowadays do it and um that's why you can also see liquidity mining basically that that different projects use liquidity mining in very different ways if you look at um uran for example uran distributed or also used liquidity mining but basically there there was like the kind of work they incentivized was just to lock up liquidity in a pool that no one can interact with so it's just staking but the staking doesn't serve anyone right um so it's completely useless work other maybe that people go

to the website and that it builds brand awareness and so on but that's that's an example of a project that completely um focused on the second part of liquidity mining which is to distribute all of the initial Supply into the hands of of the market and that's what what we earned at right I think it was two to 3 weeks and then 100% of all yfi was was already issued I'd actually be interested in kan's point on this because I mean at antics you actually started a fairly early liquidity mining program so basically what what did you guys hope to achieve with it at the time I think that look there's a lot to unpack uh there right so you know I think that the we can go we can go into like Fair launch

and like what that means and like the ideology behind it but I think there's a practical aspect to it which is maybe missed right like there's correlation between Fair launches and like very militant like devoted communities right but I think the causation is actually the wealth effect right it's it's the fact that you know people who M Bitcoin in the early days their cost bases is zero right the people who M who liquidity mined WiFi their cost bases is zero right if you can get someone's cost bases down to zero everything's upside for them right and I think that that uh you know if you look at the projects that survived through the bare Market in 2018 you know

at one point the price of uh snx was down to 2.5 right and there are people who are buying it you know for every seller there's a buyer right and and those people are deeply devoted their livelihoods their you know identities are are very strongly tied to those things and so I think that liquidity mining enables you to distribute tokens with effectively zero cost basis you know there's an opportunity cost obviously um you know but uh but I think that that creates maybe more alignment Than People kind of realize that there is this you know there's an ideology and there's like a you know a fair component to it but I think there's also just like a pure economic incentive

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forget about getting the best rate or optimizing your gas fees make it easy on yourself just use 1 inch and you can let them know that we sent you by going to epicenter.com was being incentivized and how did the process work yeah so so we needed we had this like magical like wall Garden right that you know if you were inside of it you had this uh cool property where you could take any asset and and go from one asset to another right uh with zero slippage

but you had to get in there first right and the problem was that the walls were way too high and like there were no doors and it was just like you literally couldn't get into the thing right and so we came up with this idea uh within our Discord to incentivize the the lowest risk pool that we could in Unis swap which was like the synthetic eth eth pool and you know there's very little risk for people in terms of impermanent loss and we put incentives in there to essentially allow people to go in and out of that uh pool and that was like the most liquid on R but all of a sudden we had a door and people could like go into this magical place right so that was that was really the initial uh kind of incentive and then it grew from

there we we added different incentives and and different structures so it was like more of a it was like incentivizing people the on-ramp into the synthetic system to allow people to easily acquire the snx token no the actual synthetic assets themselves so yeah it was like you wanted to be able to uh you know convert a synthetic dollar to a synthetic Euro for example right but you needed to get one of them first to start that process going so we said well people have eth we've got a synthetic eth we'll create pool that lets people go from eth to synthetic eth and then you can make the next hop to any other asset I see I see why do it with like synthetic eth

instead of with snx which then could be converted into any of the synthetic assets I mean there were there were debates about like should we incentivize SMX liquidity what with the real reason was basically impermanent loss risk right like the the only people that were going to be able to do it were fairly sophisticated about the risks of Unis swap you know we didn't have the the masses uh coming in and providing liquidity in Unis swap at that point right so there was a lot of skepticism around like who's going to step up and and put snx and eth for example um you know into Unis Swap and and take on that IL risk and 2019 was a different time right in terms of what coins had the most liquidity because stable coins had like

below $5 billion or like even like way less than that of liquidity and nowadays it's it's like 20 and 30 so would would you nowadays incentivized like the s s USD versus USD pools and not eth versus S E for example absolutely and and we did when curve came out um you know we had the the SD die usdc usdt pool that was incentivised yeah I think that synthetics is uh is really the exact opposite of of UR of the example that we gave basically the the subsidies had like zero purpose right other than Distributing Supply and synthetics is like very picky about Distributing Supply and you guys do basic like trial runs where you incentivize stuff for two

weeks at a time to see how the different agents in the system react to these incentives and if they don't react like you want them to then you basically change the parameters or try something else right so that's I like that a lot yeah so when we say liquidity mining like does it have to be something useful that's being incentivized so would we call the the UR incentivization or just like this idea of like you know generalized staking like you know when I staked all my tokens in the yams protocol was that liquidity mining or is that something like different and then even when we talk about liquidity mining does it have to be literally liquidity that we're incentivizing or is something

like live Pier called liquidity mining yeah I mean that's why I think yield farming ironically you know kind of took off right because like farming is just like doesn't really mean anything right like so you you know there's a yield in this like you know governance token or or protocol token that you're getting for f like for farming it which could be literally anything right so I think that's why a lot of people it resonated with right and I remember when it was first kind of coined for me it was like oh yeah like that makes sense like cuz it's not presuming anything it's just like yield farming it's it's very adaptable yeah and I they wouldn't really be much Point like for us to come

up with any like definitions because we we will have a hard time convincing the rest of the community to adopt them but it's just a liquidity mining like mining generalized mining liquidity mining that's and yield farming of course they are all used kind of synonymously and um I mean if I had to give an attempt then I think like mining is the act of providing kind of cryptographically verifiable work for another party in the network and that's incentivized by the protocol and then it's basically liquidity mining when the work that you do is providing liquidity and it's yield farming when it's that's basically what the user calls it when it feels like putting money in a bank account and then getting some kind of

yield for it it's I haven't really seen it used in in kind of when the work is not just providing liquidity Kane can you talk about your experience with synthetic so basically the people who provide liquidity in the incentivized pools do they typically also become you know true users in the sense that they interact with the protocol when it's not not incentivized I think so and I mean you know the interesting thing with the initial yield Farm incentives that we had is we weren't directly incentivizing you to interact with the synthetics protocol right like you had to get synthetic eth right so you had to have it from somewhere but you could have just bought it on Unis swap so we were

actually incentivizing people to use Unis swap right which is kind of funny when the retroact active Unis swap rewards were were dropped on everyone and all these like early snx people all a sudden had you know uh hundreds of thousands of dollars worth of uh uni for just being around in like 2019 right and and you know maybe putting a few thousand worth of liquidity in there so I think it was it was initially incentivizing people to use Unis swap but we got a lot of utility out of people using Unis Swap and being LPS on Unis swap that was kind of our on-ramp and we thought well we better use this thing it's going to be huge let's kind of you know uh ride in the coiles of that rather than trying to kind of you know build our own liquid on ramp and or

you know build our own decks or whatever so it was it was about you know leveraging what was there it's interesting that this kind of this watershed moment for liquidity mining actually happened before liquidity mining went mainstream like this intellectual watershed moment because in defi you can incentivize things that happen outside of your own protocol because you can still observe that this thing happened you know and it's cryptographically provable which different blockchains different baser blockchains have a lot of trouble verifying stuff that happened on on another blockchain it's the the kind of whole story behind the interoperability phenomenon so yeah that's what I think is the most interesting thing about defi that you have this one highly composable

database where everyone can interact with what everyone else is doing yeah and and liquidity mining is really us experimenting with program programming like humans in this kind of composable environment and it's extremely fascinating yeah I think one of the things that became really interesting was the fact that like all the data on the chain is is readable and so now you have the ability to access any sort of data and like incentivize it in a way that maybe wasn't possible before to what extent do you think like amm were like very necessary in this uh liquidity mining I was pretty excited about this Pro like project called

hummingbot that seems like never really took off but it was basically like incentivizing Market making on orderbook based dexes but it never really quite took off why do you think that was I mean you had to run your own infrastructure right which just immediately filters out like 99.9% of people right you know I was before we jumped on here I was like uh sitting unplugging and plugging in my dap node trying to like get uh my uh E2 validators up and running and like not having the Right Packages and stuff like if it wasn't for it being E2 there's zero chance that I'm like doing bothering to do that right like I just wouldn't be um and so you know I like

the idea of humming bot but I I think it was too difficult uh you know versus something like Unis swap where there was a learning curve like no question especially with the early like ux was not amazing but like it's maybe four clicks right like five clicks and all of a sudden you're a market maker maybe not a very smart Market maker but you're a market maker and you know you're you're there right so I just think that made it so easy for people who had these assets that were just sitting there in wallets doing nothing to go well like maybe I should you know I should put them into this pool and and get some utility out of them and and potentially some fees yeah and for the other side as well right so the there's very little point

in providing liquidity so something like Unis when it doesn't generate fees when they're only people trading against that are the arbitragers and then you kind of bleed out from the Divergence loss so I think like Unis and defi in general really benefited from this peer to pool model or P to contract as it's also sometimes called where like something like Unis SW always will trade against you when you need it and that's the kind of building block that a lot of other like this kind of invisible building block that actually the foundation of pretty much everything that's happening in defi because every project is in some shape or form uh depends on being able to liquidate Collateral of users for example and um they all rely on on Unis

swop in order to to get that liquidity when they need it and to to to be able to to liquidate the customers positions and when you don't have that assurance that in any Market condition there is liquidity there that someone will will quote you basically liquidity then these projects wouldn't work so I think that's basically the the invisible foundation for all of Def I've been building WordPress websites for over 10 years and the most frustrating thing has always been devops I'm talking about deployment maintenance backups and database management I've lost so many hours of sleep doing WordPress infrastructure management if you've been building websites for as

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assets are volatile I mean again that's kind of why you guys started with s e against eth right so what do you think the rational approach is here I mean it really depends on on the intent of the person right like there's certain pools where if you've got a lot of one asset right and and this is where balancer I think helps right uh you know it makes this a little uh more palatable right and it just opens up the number of people that can like rationally provide liquidity right or or less irrationally provide liquidity I guess maybe and and so you know if you've got a lot of an asset and you're willing to sell that asset down continuously for example right um and you're not going to just

sit there and hold it and hope that at some point in the future you can liquidate all of it at a better price right you're going to get a continuous price from whatever the the ratio is now to whatever the ratio is in the future and if you have a long time Horizon and are comfortable holding both those assets right like let's say you know you're holding Bal eth right so like I'm I'm a BAL eth liquidity provider and balancer right and I'm very comfortable that balancer is an asset that I'm happy to hold but I'm also happy to sell some down if the price starts running up you know so and obviously I'm happy to hold e and so I think under those circumstances it's totally fine to be in there and be in that pool as long as you

understand what the the trade-offs are right um you know if you're someone who's saying like I'm buying I don't know eth today at 500 and I'm planning to sell it at a th000 and you want to wait till that Target's hit and then like no you shouldn't be providing liquidity in in Unis swap like that's not going to get you that outcome so you know I think it's very specific strategies that you want to be employing but I think for the average person it's like I've got this thing dump it in there see what happens and they don't really think too much about it yeah I don't really have a ton to add to that I think in general people should be aware what they're buying when they're buying LP tokens so structurally when you put money into into an IP uh liquidity pool then you basically sell

the two assets that you put in and you buy an IP token and um well that has very different Behavior than just holding the two tokens um initially and um I thought it was I thought we we could uh there were there was a small chance that this would lead to disaster basically at the height of the the last defi runup when um first Sushi Swap and then Unis swap um and then all the copycat started basically everyone to um become an LP even those that had never interacted with them before and they these people mostly had no idea what kind of financial product they're buying they're actually selling um volatility basically and well and nobody really told them that right so

they were attracted by the Allure of uh the liquidity rewards and um but I mean I think it all like the rewards turned out to be so big because the demand for these liquidity tokens on the market was so high that no one could have really lost any money there so and I guess now a lot of people know how liquidity provision works and what they're actually buying so it was a good education in that sense but just in general I think it's it's it's good if if people who want to engage with this know that they're selling volatility and hence it is they should look at the correlation um between the two assets that they're putting in and um the more correlated they are to each other on a longer time frame the better that's why

I mean you see this actually in in the in the liquidity mining uh rewards which is interesting um because that's basically the market telling you what is the cost of um of putting Assets in there so if you want to get a feeling for that just look at um the rewards the different Unis pools and different balance of pools pay you and the more you can earn the more basically reward the market demands in order to be in that pool so I thought that's nice way to build intuition yeah that's that's a nice way of putting it can I kind of loop this back into the bigger economy so basically you said liquidity mining was so profitable because that basically no one no one

could have possibly lost any money so this is very counter intuitive you know coming you know from from a traditional uh point of Economics um so where did this money actually come from oh I mean I should clarify I guess what I meant with that one second yeah I definitely lost money I I I will say that 100% um you know not not every time obviously but there were some uh some cases um you know based was a really great example right um I managed to somehow buy like the absolute top right um so you know I was I was uh liquidity Mining and based I bought at like 200 um put it into uh pool two I think and I was like oh this

is going really well like I'll just you know double down or I think like 10x down actually is more more accurate probably and like bought a bunch of Bas at like 600 and then got utterly crushed down to like 150 and then capitulated at the bottom and you know it was it was a a pretty uh painful lesson in a permanent loss right like so you know there were other things obviously that that I did pretty well in but you know there were some examples where if you like even I would say somewhat knowing what you're doing you could still get your face ripped off pretty effectively oh yeah I should clarify that as Kane said that there were different pools tend they tended to have different

labels and the pool one is basically let's say you provide e BTC liquidity and then you get paid rewards for that and it was it was quite hard to lose on that because the Divergence loss relative to fees is very small if at all um you mostly win without liquidity um rewards even but then there was there was usually a second pool called the pool two and um there you basically you provided the the the the Project's native token let's say based against um some other money let's say eth or usdc and um that was basically to provide um exit liquidity for the people G like entry and exit liquidity for

those gambling on the the project and the rewards on those were in the thousands of percent per year but it was also incredibly easy to get in those pools because it was basically a game of chicken um basically when the when the large holders wanted to exit they could do it through this pool and then the pool would immediately collapse because all the P would stay in there they would end up with all of the that these native tokens and they would sell off all of their e or their usdc so yeah it was incredibly easy to get wrecked there and um many people did for sure okay so they were definitely pools where basically making money was not a given but on the large a lot of people got

very rich with um yield farming so typically in the in the if you don't think at the scale um of you know Nations money doesn't just appear out of nowhere so what happened here is it is it a zero sum game or not and if not then where is the excess value coming from oh I mean it comes from the people buying the liquidity tokens on the market right I mean look look at curve for example so you get liquidity rewards in the form of CRV tokens in curve if you provide liquidity to their pools and uh basically the the how high that reward is for you depends almost entirely on how much you can sell the CRV for on the market and I don't know

if youve seen it but there was the meme that the C the retail CRV buyers are actually the backbone or the foundation of the entire yield farming hype right because someone has to buy these relatively useless tokens at the time anyway and um CRV for a time had higher fully diluted market cap than Bitcoin even right so that was quite funny um and it has it has collapsed predictably uh I think over 90% since then but so the money is not created from thin air in that sense it's it's coming from the people who buy to who buy these liquidity tokens let me dig in there so basically the liquidity I mean basically the the

tokens that are for instance in the case of CRA it's a governance token and most of these tokens are right so basically in a would it be correct to say that in a way you're buying future Equity or future to to become a shareholder or you know in traditional terms a shareholder of that project by buying curve tokens retail are you in effect buying a bit of curve as a project so basically in a way do people actually incentivize with future bits of the project yes but the problem with curve is like you're the vision fund right

buying at like 48 billion valuation when the market uh you know doesn't really believe it right and so I think that my my sense is there's two sources one is reflexivity right like these are highly reflexive assets that didn't exist right and people are holding them and believe and we all believe collectively like that there's some value to curve or Unis swap or you know uh any one of the like new crop of assets like yam Etc right that that kind of popped out of nowhere and as long as there's enough of them and they're sufficiently distributed and like sufficiently uh illiquid that some people are going to hold on to them and

feel like they have value that's where a big portion of this like new money came from right and then I think on top of that you then had the fact that there was kind of energy coming into the system from uh Bitcoin flowing onto uh eth for kind of the first time right like we all of a sudden saw all this BTC like just crazily flowing from somewhere right like you know it wasn't doing anything sitting in my cracken account I'll tell you that much right and it's now all my btc's on ethereum so all of that BTC flowing in that is suddenly buying things like that purchasing power turned up and I think it was a combination of a few of these different things that that kind of created this

new value right that that previously wasn't I mean it was technically there right because curve existed pre- token and had some value it was generating fees right and all of a sudden there was now just this like tangible liquid is representation of what curve was right that was tradable and and you know you then multiply that by like 20 30 different projects and you had stuff there all of a sudden yeah yeah I would agree and I also agree with you FR that I mean these it's definitely right to think about these governance tokens even though they are called governance tokens as a form of pseudo equity and um while it can look like I mean the the the current

buyers who are buy acquiring CRV and these other tokens at seemingly very high prices if curve would end up replacing kind of the large Forex exchanges or whatever um then of course that bet can also pay off right it's a sort of venture bet I think that's the right way to think about it and um if it succeeds then you would have incumbent financial service providers lose and uh Curren CR RV buyers win our friends over at alaran are starting an office hour Series so every week or two alaran will bring together their team partners and community together for a live discussion intended to provide you with all the answers and resources you need towards building

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otherwise how valid do you see this claim I mean it's not a very credible claim like the the data doesn't support I mean I guess it depends right on on what your metric is like how much volume how much liquidity but I mean even curve right there were no incentives for for curve uh you know and and there were two 300 million in in liquidity that was uh you know in curve because it was generating fees like it was the best yielding thing pre like the crazy you know yield farming like it was the best yielding you know location for your stable coins like it was the only yielding location for your stable coins it was the only place where you could put your stable coins in Fairly

comfortably risk adjusted the yield was amazing um you know so like that's been kind of washed out with like the these you know massive returns from uh from seniorage but like that was a good thing and it made sense and it was tangible it was real yeah and the week the week before sushi sushi swap even launched which was the first um big scale liquidity subsidy for for amm UNIS swap made headlines in mainstream media because it actually surpassed coinbase in transaction volume right so that was before any liquidity subsidies so I think it definitely have to I mean make it even more liquid even

in some pairs where the traditional exchanges were dominant up until that point but in general I think the rise of amm was uh Unstoppable even before that and second I think it's also an unfair comparison um because you really like a if you start a traditional exchange like FTX then you raise Venture Capital typically or what they did is they sold a token and raised hundreds of millions of dollars from well from the market basically and then that flowed back into their Market making operations but usually when you when you start like starting a traditional exchange is very difficult it has the same problems of bootstrapping liquidity um you won't get any takers unless they're makers so they

all start out either by making markets on their own exchange or and I mean a lot a lot of exchanges get super wrecked making markets on their own exchange because Market making is very very difficult and um what you this is like when you're the when you're making markets in poor way on your own exchange what what happens is you attract the the smart takers who will pick you off whenever you're quoting some like a wrong price and you will bleed out hundreds of millions of dollars um over the first years of your operation so what they tend to do is they take that the money that they raised and they incentivize basically Market making by professional Market making firms and

they also pay so this is just the same this is just they pay liquidity rewards for market makers so it would be really unfair to to say Well amm only took off because of liquidity mining because they they used the kind of subsidies to attract market makers while order book based exchanges do the exact same thing and nobody talks about it right so I mean either we we accept it in both or um I mean you would see none of these large exchanges if they would give maker rebates that's a very good point but how sticky do you think the the liquidity provision is Sushi swap um for the liquidity from Unis Swap and then they kind of fed it back and then Unis swap

kind of upgraded to V2 and basically I mean all of them a lot of the liquidity kind of migrated incredibly quickly so what's what what's the sticky part here actually I mean is it the brand Unis swap or is it I mean it's can't be the contract right I think if you if you take a step back right the the stickiness is in the market itself regardless of which contract it's in there are people who with assets willing to provide liquidity regardless of whether it's in sushu swap or a curve or Unis swap or whatever right so I think when people look at and go oh well it went from here to here to here and it's bouncing around like those people are optimizing for the best yield they can get at that time but they have

bought into the idea that providing liquidity being an LP in an amm is a thing right so some amm liquidity is going to exist it's it's kind of created this network effect which I don't think is going anywhere yeah and I think this touches on a very important question which is what are we actually incentivizing I mean and syn this is what synthetics is so good at in my view because they only incentivize liquidity when they have actually a thesis that they want to invalidate and they know exactly what they want to test and when you but when you create these like large scale incentives for for for market makers in like Unis swop for example or sushi swap

it doesn't seem as focused it's like what is the I mean so in my opinion what they should incentivize is basically incentivize uh to own the custom like a focus on owning the customer I think that is that is the thing that is actually sticky like the users to go to to the Unis app and to then take basically their business there because we know that for the LPS themselves they can switch with the click of a button right but it's the users who are more sticky and it's it's not sure yet that um system like Unis swap or like sushi swap that they can own any customers long term or if basically the customer will be entirely owned by aggregators

like 1 in or matcha who basically just search the market for the best route and then they rote the the the users order through there and they they are the one charging then all the fees on top of it or maybe if it goes even a step further than that if if it will be metamask or Argent wallet or coinbase wallet who will end up owning the customer so we have no idea yet at this part of the market cycle in my opinion so it could be that like all of this liquidity incentivization will be for not in the end in amm I think that's entirely possible so k at the beginning of the episode you mentioned that like you know

liquidity mining is most useful when you're trying to like create a network effect so how do you explain this sort of like uni token where it's like you know unisoft clearly within the defi Bas has already such a strong Network effect what was the point of introducing liquidity mining there I mean it was pretty obviously a reaction right um you know I I think there was there was an intent at some point to deploy a token and like I'm maybe the most out there person uh that I know of in terms of like you know and have been for a long time in terms of

like token uh maximalism right like I believe that tokens are inherently valuable and I think the design space of tokens and and using them as a coordination mechanisms we're not even like close to having explor right I think that there's so much more that we can uh we can do around like coordinating you know behavior and so when we look at Unis Swap and say like okay was it that effective like is it kind of wasting like probably honestly like if I if I have to you know be totally honest I think it is but it's also Distributing the token and someone needs to decide whether they want to hold it or not um and therefore what they will what they will do right like

there's there's some long-term alignment in terms of people who are holding uni tokens so I mean what you needed interestingly that a lot of the other liquidity mining uh programs didn't do is they they did this backward distribution right so basically anyone who kind of was a regular and possibly even privacy conscious uni swap user you know over the past year or so got a lot of uni tokens so don't you think that the the way that Unis swap actually did the distribution um kind of targeted a an organic distribution of the uni tokens among the users more than the forward

usage I mean I think it was kind of a second order effect right I don't know if it was if it was the primary goal to do that or not what I will say though is that it did what I had kind of described earlier right which was established for a ton of people as zero cost base on their uni holding right so of course some people you know if you give them something for free going to dump it of course right um you know but the market was pretty happy to kind of absorb that selling um and we found an equilibrium fairly quickly and we're now in a position where there's a lot of people who are still holding those uni tokens that are very bought in uh you know to the project um the one issue I think

that that Unis swap has is because the token is so new they haven't had a chance to kind of get that community in the way that like some of the other uh projects out there have like a you know an A or um you know there's there's a bunch of examples like you know where the token's been around long enough that a community is kind of formed like there's a lot of unisoft users out there but if you go into the I mean I remember being in the unisoft Discord and just being like this is incomprehensible what these guys are talking about right like there are a bunch of engineers in there it was very smart people talking about very hard problems and I thought it was cool but it was like way above my pay grade right I don't think that there were that many

uh people in there that were like talking about like usability or like excited about the project like from a user perspective and I don't think that community's ever really kind of emerg like even from what I've seen uh you know today so at some point that needs to happen if Unis swap is going to have like a you know user driven Community Driven brand awareness and and growth mechanism and I just don't think it has that now it's getting away without it but it would be far more beneficial if it had it yeah that's one of the main benefits of a token right in my opinion that it it crystallizes Community um there way less just incentive to engage in a community uh that doesn't have a token if you're not because you're not

financially invested in it whereas with projects that do have a token there have this kind of double incentive to be part of that community could talk about as well about the retroactive distribution of Unis swap so um I think that goes back to the two goals for liquidity mining which is one Distributing the initial Supply and second is to basically incentivize future Behavior right and um you're totally right that if you retroactively distribute tokens like what's that going to do for behavior of people in the future at least not in a very direct way but I mean the second aspect is also important important and if you think about what what happens every time when you say okay the people with the biggest

Pockets get all of the tokens in a highly predictable way then you always get the same outcome it's the same three to four firms that ow 90% of your tokens we've seen this with many projects and I mean most people don't really notice that right but it's true that's why projects are looking for ways to distribute some tokens also in a way that is not where but just the amount of capital that you have is not the only factor that is looked at but other factors are so hard to to do like in a non- gameable way and the only way or like the way that unisoft did it which was very elegent is to look at something that has already happened because then

it cannot be gamed anymore and um giving it away to to these early adopters I thought was um was a a great way that I I would think that some other projects will probably copy in in some small way at least so in a in a way Unis swop actually did a 180 right so basically I mean they they were always this community darling and then I know a lot of people who personally would have loved to invest into Unis swap but instead they actually went the VC route and then kind of after the entire Sushi thing happened and their liquidity was fooked they kind of uh came up with this uni token and gave it out to the

community do you think that was I mean obviously that can't have been intended or at least that's my stance that it probably wasn't intended from the get-go do you think this will kind of put an end to to to these VC offerings um of you know fairly established projects in the space do you think um I mean Kane we all know that you're token maximalist but do you think I mean uni could have Unis swap could have done a token earlier right instead of going to VC do you think we'll see that more and more I think the reason why they didn't do a token is not because it was a choice between VCS and and selling a token right I think it was anti- token uh rhetoric

that had like infected the core ethereum community of which you know Hayden was was paying a lot of attention to right there were a lot of people within the community that had uh very deep distaste for what happened in 2017 right and even all the way going back to 2016 right like this idea that if you had you know created a token ever read the erc20 contract whatever like you know if you'd even come within you know 100 fet of it that there was some kind of like black mark against your name right and that was like deeply embedded in the community for a while which was this just very visal reaction to the craziness of of the Ico boom and I think it it overcorrected massively and I

think had that not happened Hayden probably would have been much more open to doing a token and maybe it would have been like VCS and and you know a token in parallel or something like that but there was very clear and obvious anti- token kind of stance from a lot of projects at the time right and they would even come out and I don't think Hayden did this right um but like a lot of people would come out and like you know even use it as like oh we didn't do a token right like go to their website and like the first line is like we didn't sell a token we never did an Ico like that was like a you know like a a rallying cry like for a long time right in the community and I just think that was misguided I I think it just it

was not really uh you know beneficial in the end it was an overc correction I think that that's um that's kind of you have a market cycle within the market cycle in in crypto and acceptance for tokens is definitely one of them so so everything needed a token even stuff that really doesn't need a token 2016 17 and then now we I feel like we are maybe a bit overcorrecting in the other direction right now so right now like everything that can have a token should have a token even if it maybe doesn't make sense like you see this with governance right so governance is not just I mean governance is used as

an excuse right now to launch tokens when the governance is really not something good for the project but it's more of an attack Vector than than actually is maybe necessary for for the project to work I mean on something like compound right you could argue that um there needs to be someone who sets the safe collateral limits who can add new tokens like approve them and um tune the interest curve and whatnot tun right that that should be tun just uh sitting in his Ivory Tower just tweaking all the components yeah exactly I think that's where they're going right it's it's uh parameterized tuning of as a service right yeah and

then get paid in kind of tokens of fees very interesting business model but yeah I mean you can have other other projects like I mean for UNIS definitely you can argue that a token has a lot of benefits to them in terms of crystallizing community but like what is really the the benefit beyond that right luckily we haven't really seen any big takeown of project with governance tokens where they kind of Rogue approved some kind of dramatic change and stole customer funds I mean we could have seen it with maker where anyone could have like I think it was like 4% of the total mkr Supply that would have been enough to stake them on a new executive contract and that

contract could have paid a billion dollars to have the hacker right and um and now a bit later we saw that the meica approval was actually uh a mecha proposal was was approved with a flash loan so we kind of saw the first interaction between those two concepts and um I think we are getting like we are getting we will get to a point where um the community starts to see governance tokens as as a risk Vector again and then we might see a correction in the in the other uh in the other direction again in my opinion what are some projects right now that you think would most benefit from

some sort of liquidity mining system that maybe don't have it now tornado catch I been yeah anyway that's a long story um we've been talking about that with the the the two Romans for a long time um and I think I think it will get one um you know uh and I think they maybe in the early days fell into that same you know anti- token mindset a little bit you know and I don't think you need it you need a token to build a project clearly right and you don't even necessarily need a token to govern a project I mean even with us right like our our recent governance moves the fact that we're not even using the token as

the waiting for governance anymore we're actually using your percentage of the debt pool that you represent right which doesn't even really like necessitate a token at all like we could have another form of collateral and then be waiting it against the debt pool and you know so there's other I mean this goes back to the the point um you know that I think you made s about like you can read anything like we can we could use like your Unis swap holding as like our governance right if we wanted to like you know if you're a Unis swap LP you can come in govern synthetics like there's nothing stopping us from doing like any arbitrary uh kind of you know read um within the the ethereum state and then using that as governance right

so I think you can still govern a thing it's just a question of like the incentive alignment going to be right there if we're using Unis swap LPS to govern synthetics like is there any you know misalignment there and I I think in some cases yes in some cases maybe no I give another answer so what project would benefit most from liquidity Mining and I would say the lightning network uh for Bitcoin and really any layer too right you have the same problem on ethereum and you're going to have this problem with optimism um and other chains any layer to is basically a blockchain of its own and um starts with zero Network effect and so I think um you will see liquidity mining there in

order to basically bootstrap the the network effect and I'm like I'm way more optimistic that optimism will succeed with that than the light network will because of this aversion against tokens that's very unfortunate I just went down like a like a micro Rabbit Hole there for a second like I I feel like if you did try to propose some protocol incentives to the lightning Network a it would be contentious everything's contentious it's Bitcoin right um but B you would need to like it would end up with some like contentious hard Fork right where like one version actually incentivized lighning Network and the other one you know like big block small block kind of

uh you know ining battle right and I like I think maybe ironically the like lightning Network incentivized version of Bitcoin that like pays out like you know BTC level uh you know block rewards to the lightning Network could actually be more successful yeah I mean I'm I'm not sure it would lead to a for the the interesting thing is you could do it in a way that doesn't break the lighting Network I mean if you if you would have like a second form of channel that pays out future equity in its routing fees to people who route through like money through it today or whatever I mean that that could exist in theory right and um anyone could interact with it without partaking in the liquidity mining itself

so I mean but the reason that we don't see this is of course because of the huge social barrier against entertaining any form of token uh in the Bitcoin community so um I don't think really it's it's the technical hurdles or it's even the threat of a hard Fork it's purely like the kind of social pressure on anyone entertaining these ideas it is possible to have the source of the liquidity mining incentives be from something other than the base protocol or like the lead development team not for lightning that work I was like once a couple of months ago considering trying to build some something for interledger to do exactly this like how

do we create incentives for people to participate in the interledger network or even like before the uni token was launched there was this like short-lived project called uni da which was like it was just this like reaction to the sushi swap where they were like oh let's air drop tokens to all the udis swap LPS and they asked me to be a multi- signer for that so I'm like sure I wasn't other involved too much otherwise but like so far we haven't seen one of these like really take off where like all the liquidity mining has always come from the protocol or from the lead development team but do you think we will see some successful ones from other sources eventually very interesting um question for sure I

mean in theory we have this huge um developer funding system or Builder on bitcoin right that's very mature um you have a lot of grand giving institutions and in theory nothing prevents these same institutions to Pro like incentivize liquidity on the light light network if they think that's the best thing to make Bitcoin grow you don't necessarily have to pay developers you can also pay liquidity providers but I think that's totally viable I don't think we'll see it in Bitcoin but um in general I could imagine like for example the ethereum foundation or any kind of other Foundation could also do this kind of incentivized this kind of pro this

kind of programs in a way if you think about it Susi swap for a while was basically incentivizing liquidity on Unis swap yes was totally right yeah yeah I think when there's like a power vacuum right like when there's no clear intent to to kind of Step In that's when the opportunity arises for someone to say well if it's not going to coordinate itself then we'll create this new coordination mechanism that maybe exists outside of like whatever the core team or project or you know and and go and do it on their behalf right like there's nothing stopping anyone from from doing something like that so you know it's it's certainly possible in the future if there's protocols that aren't doing much

for that to happen and so far we have only talked about things that benefit a protocol right um at least in like like you can incentivize liquidity in something like Unis swap to drive more liquidity to it but then we we saw Sushi swap which which was the first in sense um the first instance of okay let's create liquidity to take something away from someone else and I mean this always kind of exists right um You probably saw tun's paper saying that like proof of stake always competes with the yields provided by defi for example right so and defi yields are very high then proof of stake system could have very little

money staked and therefore be very in insecure as a base layout but so that just goes to show that like liquidity always competes with each other on even like a global scale but Sushi s was a very direct attack on the on the liquidity of Unis to pull that over but I mean ultimately nothing would stop let's say like a nation state to incentivize miners for example to join the mining pool and that mining pool uh sensors basically non-whitelisted transactions or whatever right so that is the word of basically the this new era we are in right where where anyone can create the incentive for anything in

a permissionless way and um we are barely scratching I think the surface the surface of that and um there are some very scary some very scary possibilities there are there any good examples of liquidity mining sort of being done in pre- blockchain systems I mean I I think a lot of the growth H you know I remember I don't know what year it was like in the late 2000s reading the Andrew Chin like growth hacking uh ebook right that he that he released for free and like some of the examp like that was mindblowing for me right like at that time to to read that because some of the examples

were like so ingenious right like you know the example of like Airbnb injecting their like you know basically uh tapping into the Craigslist not even like an API there wasn't an API at the time but like into their like uh frontend flow right to uh to you know post listings right and so they like basically were able to like create weird like overlay on top of Craigslist that would allow anyone to just crosspost their Airbnb listing to Craigslist right which obviously had much bigger Network effects like that actually pulled Val like Craigslist was getting value out of people paying you know to or like from you know ad Impressions or whatever paying to view that content right those

uh and it was one of the big like uh categories within Craigslist right and all of a sudden there was this like parasitic entity that uh that you know pulled and then like obviously did like you know Craigslist I don't think has uh you know for I mean maybe like for rentals right but like short-term rentals I think that game is up right um so I think there are examples where you know if something is not well defended people can turn up and siphon off in this case like rental liquidity I don't know I don't know exactly what the best term is for it but like and and I think a number of the other examples were very not nefarious but certainly a little bit underhanded right like taking advantage of someone who's like slow moving and

not really paying attention what was going on they were a startup they were fast they had the tech and they built some cool things to just inject themselves into this flow of some other larger lumbering Beast like uh Craigslist and and you siphon off their users or attention or money or whatever yeah I guess depending on how you define liquidity mining you can find examples that go back to the beginning of time I think one thing that basically the blockchain has enabled or has upgraded liquidity mining in that sense is that a lot of things can be now cryptographically verified that that the work actually happened and that that often enables the work itself to be done

in a permissionless way and yeah by anyone in the world without having like kyc and so on so that that I think is it it kind of puts these kind of liquidity incentives into it globalizes them and de democratizes them in a way I feel like another piece was like you know often times past the incentives it's very easy or it's easier for like companies to airdrop like dollars to users but like airdropping their own company's shares is like not really feasible in a traditional world yeah totally it's kind of frowned upon yeah do you think uh there's going to be an increase in more traditional companies doing this like I don't know if you guys saw the Snapchat announcement where they like are giving away like a million

dollars a year for like the top snap apps on their platform and stuff well a million dollars is still not Equity right I mean it's still you're still not an owner of the business so which company was it a few days ago that asked to IPO with security tokens I'm not sure but I read some proposal like that I mean ultimately I think you would see a lot of equity exist on a blockchain and I think once you're there then it will be way easier to uh distribute these shares as well to like yeah users of that blockchain I think you would see a convergence between the two worlds is the typical defi user not a lot more risk taking than the average

human I mean do you think do you think the same mechanisms will work on average Joe than did on defi Joe I think so I mean it it really you know it depends I guess the longer term incentive uh of owning like some aspect of the thing right like you know if you think about you know a lot of marketplace uh Network effects right like you know things like you know Amazon Etc uh when when the third party marketplaces were um were launched it was really hard to get people to participate because you know there was this idea that there was cannibalization right like they were just going to cannibalize their own uh revenue from their direct business or or whatever I

think you could temper that concern significantly by saying well you're going to have you know if you participate in this new Marketplace that we're setting up you will have some longer term ownership of it right but I feel like there's someone who's running a business who kind of understands what the potential value of that is versus like an end User it's maybe a little bit harder to to you know I don't think defi users are like end users in the sense that we would normally describe them right like they're they're a little bit more uh involved in the process um so I don't know is the the honest answer like whether that will extend to like everyone everywhere um but it's certainly worth

trying let's see you could see it in a way even as you know some sort of antitrust action right because if you look at traditional marketplaces I mean there's always a natural monopoly that emerges if you say look there is a monopoly and we kind of accept that but it's not going to be a company it's going to be a DA or it's going to be you know the users as a group uh then obviously having a monopoly is way less concerning than it would otherwise be and and I think there's another critical component to it as well which is like barriers to entry so you know if you have an incumbent that has a a pseudo Monopoly or whatever that's a dow right and doesn't have the

ability to coordinate Institute some sort of regulatory capture such that they're you know poor positioning in the market is is maintained through you know some like extra Market activity right like that's outside of you know just uh operating and and being efficient then I think it's okay right if the Dow you know captures the US government and you know has a bunch of uh senators or whatever in their pocket then I think it's equally bad right like we don't want inefficient markets even if they're owned by everyone I think that's still like a net negative outcome for for everyone I think um it's my theory that we go to I mean we're talking a lot

about breaking up monopolies right now and decentralizing the world but I think that crypto can also have the opposite effect because of how much more difficult it is to capture value in crypto and um I think this will lead to there being even fewer even larger winners who then emerge right so I think crypto is all about networks and network effect and I I think we could see um like some something like crypto could have the effect that like we replace like three large companies with one huge Network right and um and that would be a monopoly of its own then but I think the switching cost is so low right and this is I think the critical thing like provided the

switching costs to go from Unis swap to Sushi swap if if Sushi swap is able to come in and uh you know create a slight tweak to the Unis swap model that is much more efficient and everyone can switch very EAS easily and coordinating it is is not hard then I think it's okay I think that's fine like then you just have you know this chain of Behemoth decentralized entities that like constantly getting replaced I think that's actually an okay outcome yeah that's that that would be a fascinating outcome for sure I think that that's the the big promise right of of crypto is to to lower the exit cost for the user create more competition by being open source and forkable and having these anyone being able to boot

strap incentives basically from thin air right in traditional markets you have to have access to Capital upfront from some kind of venture Venture fund or whatever in order to even compete with an incumbent business but in crypto you can like so far at least you can just create your own token and say hey this basically stands for any future Revenue we generate and um and then let price Discovery run and and very often these tokens will then be regarded very highly by the market and uh so it definitely lowers the barrier to entry for like for competing in the market and it lowers

the barrier to exit for the user which is in both cases very good I think this is actually quite a nice note to to end on it's a you know a a good outlook so Kane and hzu thank you both for coming on so much it was uh fascinating thank you it was really fun thank you was was our pleasure thank you for joining us on this week's episode we release new episodes every week you can find And subscribe to the show on iTunes Spotify YouTube SoundCloud or wherever you listen to podcasts and if you have a Google home or Alexa device you can tell it to listen to the latest episode of the epicenter podcast go to epicenter.bg interact with us guests or

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