Unlocking DeFi Market Growth - Welcoming New LPs by Reducing Uncertainty Burden

If you are an active DeFi participant who frequently engages in airdrop events, you might have experienced frustration from ambiguous reward terms. You probably had to gather details on investment status and token issuance to estimate the rewards. Even after thorough research, you might have been disappointed with the results, realizing you could have earned more from other opportunities during the same period with the same assets.

The ambiguity problem goes beyond mere inconvenience for LPs. It undermines the ethos of blockchain and constrains the growth of the on-chain DeFi market. So why does this uncertainty persist? To understand the history behind this, let’s first examine the purpose of airdrops from the protocol’s perspective. For many DeFi protocols, airdrop events serve two primary objectives - 1. Organic user bootstrapping and 2. Liquidity bootstrapping.

The most straightforward strategy to attract LPs is to allocate specific reward amounts for each action in the event. However, this approach directs LPs’ motivations toward the rewards, as they focus on calculating their gains on each action. This method often attracts cherry-pickers rather than fostering organic activity, generating only temporary liquidity and engagement.

In order to convert airdrop participants into organic users, many protocols shifted to announcing only the percentage of tokens allocated for the airdrop event. Without specific rewarding actions disclosed, users are encouraged to explore core functionalities within the service. If LPs find the service beneficial while exploring, they might continue using the protocol.

However, this approach also carries a risk of inefficient token spending. If the gathered liquidity falls short of expectations, the token allocation per liquidity turns out to be inefficient. For example, if a protocol allocates 1% of its tokens expecting to raise 10M dollars in liquidity but ends up with only 1M dollars, the spending is inefficient. Suboptimal token use is detrimental because tokens constitute a critical portion of financial resources for protocol builders.

The recent introduction of the point reward system has shifted the burden of unpredictability from protocols to LPs. By deferring the decision on reward per point until the end of the airdrop event, protocols retain full control over token allocation per liquidity. The points allow LPs to project their expectations while mitigating protocols’ risk of poor results. However, LPs now face greater uncertainty, swayed by the protocol’s retrospective decisions.

Public airdrop events have evolved to promote organic activity and reduce uncertainty for protocols, but this has hindered LPs’ informed decision-making. As a result, the discrepancy between LPs’ expectations and actual reward distribution has led to many disputes, often causing protocols to retroactively adjust rewards after they are finalized.

This issue extends beyond individual LPs’ confusion over ambiguous reward opportunities. The unpredictability of yields deters participation from various liquidity providers, particularly institutional, large-scale LPs. For institutions, the decision-making process for liquidity allocation involves many stakeholders and thorough analysis, leading them to avoid uncertain yield opportunities.

Therefore, institutions prefer private, contract-based liquidity provisions with clear reward terms. These private deals typically involve superior yields compared to public events in exchange for providing bulk, stable liquidity over a set period. This creates a barrier between the reward opportunities available to retail LPs and those accessible to large-scale LPs.

Since its inception, transparency and equal opportunities have been the core ethos of blockchain. On-chain DeFi activity should invite both individual and institutional-level liquidity to participate in reward opportunities on equal footing. Achieving this would not only align with the values of the blockchain industry but also significantly increase the size of the on-chain DeFi market. However, to accomplish this, the issue of ambiguous reward terms must first be resolved.

Mitosis is dedicated to addressing this issue. Its goal is to provide LPs with upfront, clear reward terms for informed decision-making and allow protocols to avoid the uncertainty risk associated with resulting liquidity. These efforts support the core values of the blockchain industry and aim to foster the growth of the on-chain DeFi market. Detailed information on Mitosis’ approach will be gradually released. Stay tuned if you resonate with the uncertainty burden in the DeFi space.