See, this is the problem with liquidity mining. It’s all fun and games in the beginning when nobody knows about the protocol, we attract liquidity (of course we do, we’re giving LPs free “money”).
But then how quickly it becomes a slippery slope. Like a drug, basically. We have no choice but to keep distributing rewards and incentives because if we stop, a competitor will come in who will and liquidity is going to migrate to them. Our LPs are addicted. It’s already the case with SushiSwap and others on other chains. And more protocols will be created in the future because everything is open source and forkable and despite what we might think liquidity has very little network effects. Liquidity in DeFi is a mercenary, it will go where it’ll make the most money because there is no switching cost.
All this at the detriment, of course, of UNI holders. Case in point, the CRV token, where they are basically printing an unlimited amount of rewards just to try to keep liquidity there. As a consequence the price of CRV just keeps tanking and this despite basically CRV being completely useless outside of staking which is another artificial mechanism created to try to keep people from dumping it. Liquidity providers there are slowly realizing that they are being paid rewards in a token whose value keeps declining so they’re incentivized to sell it as soon as they receive it, which puts further sell pressure on price. It’s a vicious circle.
Liquidity mining was never anything more than a financial hack. Perhaps, in the very early days of a protocol, it has value in attracting capital. But it cannot be used all the time. When does it stop? There is no proof that liquidity mining attracts long term capital. At best, it attracts capital while rewards are running and most of that capital will flee elsewhere when the rewards stop.
We need a better strategy. We need to think long term. Liquidity mining is very short term thinking. Synthetix lives on liquidity mining and today exists as little more than a zombie protocol. They have an average of 42 trades per day over the past 30 days (!). Can you believe it? See for yourself on their stats site. The fact that they are valued at $1.8B is nothing more than financial hackery that is common in crypto (Cardano, anyone?). They have still not found product-market fit.
Uniswap, on the other hand, probably has. We don’t need financial hackery schemes. It dilutes UNI holders but most of all it dilutes the brand and arguably the brand is one of the only sustainable competitive advantages we have against up and coming protocols.
If LPs aren’t migrating organically from v2 to v3, then there’s a deeper problem that a few UNI rewards won’t solve, at least not in the long run. Perhaps they don’t want to actively manage their liquidity, which they’ll have to do in v3. Perhaps the solution then would be to create liquidity management tools to help them do that. Rewards are not the solution.
I am disappointed in this proposal. It highlights the major problem of protocol governance more generally. Short term solutions will sometimes prevail at the detriment of longer term sustainable solutions. This is not a problem we’d have if governance was in the hands of a small founding team who think about Uniswap 24/7. Arguably given the amount of votes Hayden & co control, it still is, which is a good thing, in which case what we have is simply the illusion of governance.
Food for thought.