In the decentralized finance (DeFi) space, liquidity mining was once a popular mechanism used to incentivize users to provide liquidity by rewarding tokens. However, TapiocaDAO officially announced the end of liquidity mining today and launched a new monetary policy that aims to achieve sustainability, permanent value capture, and financial alignment of investment participants. This new mechanism is called DAO Share Options (DSO) and is considered an innovative solution to the liquidity incentive trilemma. This article will detail the background and impact of this paradigm shift.
The Rise and Fall of Liquidity Mining
Liquidity mining informally began on June 16, 2020, when the decentralized lending protocol Compound launched this mechanism. Participants can earn COMP tokens as rewards by lending on the Compound protocol. These tokens are used to increase borrowers' returns and subsidize borrowers' interest rates. Compound's total locked value (TVL) increased by 600% in an instant after the liquidity mining program was launched.
However, Compound's rapid rise also brought unexpected negative effects. According to the report, only 19% of accounts retain more than 1% of COMP tokens, and the remaining 99% of liquidity incentives are dumped on the market. Do these recipients retain an economic interest in Compound? The answer is no.
Second, Compound's costs when leasing liquidity (minting and circulating new tokens) compared to the revenue generated by leasing liquidity often result in huge operating losses. In this case, operating losses refer to the difference between the protocol's operating expenses (issuing reward tokens) and revenue (fees). This is the main harmful effect in addition to the severe dilution faced by COMP token holders.
DeFi's Profitability Dilemma
As shown in the above figure, almost all DeFi protocols are extremely unprofitable. This is not because there is not enough revenue generated. In fact, the revenue generated by DeFi protocols is relatively large. For example, AAVE has an annualized revenue of $101.4 million. The problem seems to start with 90% of its revenue being distributed to borrowers, leaving the protocol with a profit margin of only 10% or $10.92 million, but this is not the core problem. The protocol itself still has millions of dollars in revenue. The root of the problem lies in liquidity mining. AAVE paid $74 million in incentives to rent liquidity, resulting in a net loss of $63.96 million, even though it is one of the largest protocols in the DeFi space. Does AAVE need to issue AAVE tokens to liquidity providers (LPs) for free? The answer is no, but it is the case.
However, the only profitable protocol is Maker. It generated $28.61 million in total revenue, all of which went to the DAO. This is because there were no dividend payments for reward tokens. This proves that not every protocol needs a token. Many DeFi enthusiasts are used to protocols handling token issuance like Jerome Powell with a magic printer, and they prefer this approach.
TAP Token:
Solving the Liquidity Incentive Trilemma
The DAO Share Options (DSO) proposed by TapiocaDAO is a brand new mechanism that aims to solve the liquidity incentive trilemma, namely sustainability, permanent value capture, and financial alignment of investment participants. Through this mechanism, TapiocaDAO hopes to bring revolutionary changes to the DeFi space.
Sustainability
The DSO mechanism is designed with long-term sustainability in mind. Unlike traditional liquidity mining, DSO does not rely on the continuous issuance of new tokens to incentivize users. This means that the protocol can avoid inflation and dilution of token value caused by excessive issuance of tokens.
Permanent value capture
The DSO mechanism ensures the long-term economic benefits of participants. Through this mechanism, users can not only obtain short-term returns, but also benefit from the long-term development of the protocol. This design of permanent value capture makes participants more motivated to hold and support the development of the protocol for a long time.
Financial alignment
The DSO mechanism achieves financial alignment by closely aligning the interests of participants with the success of the protocol. This means that participants do not just participate for short-term benefits, but contribute their resources and efforts for the long-term success of the protocol.
Future prospects of TAP tokens
With the launch of TapiocaDAO, TAP tokens are expected to become the future star in the DeFi field. By solving the liquidity incentive trilemma, TAP tokens not only provide users with a more sustainable incentive mechanism, but also bring new hope to the entire DeFi ecosystem.
Advantages of TAP tokens
Sustainable incentive mechanism: Through the DSO mechanism, TAP tokens avoid the drawbacks of traditional liquidity mining and provide a more sustainable incentive method.
Long-term value capture: Participants can benefit from the long-term development of the protocol, ensuring their long-term economic interests.
Financial alignment: By closely aligning the interests of participants with the success of the protocol, TAP tokens achieve financial alignment, incentivizing users to hold and support the development of the protocol for a long time.
Application scenarios of TAP tokens
TAP tokens can not only be used for liquidity provision, but also play an important role in other scenarios in the DeFi ecosystem. For example, TAP tokens can be used to pay transaction fees, participate in governance voting, stake for additional income, etc. This makes TAP tokens have a wide range of application scenarios and huge potential in the DeFi ecosystem.
Conclusion
TapiocaDAO successfully solved the liquidity incentive trilemma by launching the DAO Share Options (DSO) mechanism, bringing revolutionary changes to the DeFi field. As the core of this new mechanism, TAP tokens are expected to become the future star in the DeFi field. By providing a sustainable incentive mechanism, ensuring long-term value capture, and achieving financial alignment, TAP tokens not only provide users with more stable returns, but also bring new hope and opportunities to the entire DeFi ecosystem.
In the future, with the widespread application and promotion of TAP tokens, we have reason to believe that TAP tokens will become an important part of the DeFi field, bringing more value and benefits to users and protocols. Let us wait and see and witness the success and glory of this innovative mechanism.