The origin of the concept of “liquid mining”


Editor’s note: This article comes from a series of blogs written by YFI founder Andre Cronje before starting the project. Among these three short articles, the first one is the most important. In a few words, it outlines the origin of the concept of “liquid mining” and the challenges it brings to the DeFi world. The following two short essays introduce the author’s ideas for solving problems, which are not easy to understand, but they also have documentary significance.

Yield Farming

We have successfully developed a new liquid mining (Yield Farming) product, but before launching, I hope to explain a few concepts.

When we developed iearn, the choices we had were very simple: Aave, Compound, Dydx, and Fulcrum. Each product provides a lending market for different assets. You can borrow the assets in your hands and earn a passive income.

Pure age.

The SNX (Synthetix) project introduces the concept of an incentivized pool. They hope everyone will provide liquidity for their sETH pool, and they realize that the best way is to reward early participants: if you provide liquidity for the sETH/ETH trading pair on uniswap, you can get SNX tokens As a bonus.

Older players like me may still remember Havven, remember that the goal of SNX is to make a new stablecoin, which is sUSD in the Synthetix exchange. But at that time, there was only Uniswap V1 and only a liquidity pool of assets/ETH, so they could not only incentivize a liquidity pool containing sUSD/ETH, but only incentivize multiple pools.

Then there is CRV (Curve), a new and simpler automated market maker (AMM). To say it is simpler does not mean that its formula is simpler, but it is more concise in design. With Curve, everyone has a new way to use stablecoins to participate in passive income. You only need to provide DAI and/or USDT to earn handling fees.

Therefore, those who have been paying attention to this field will know that there are already some methods that can allow us to earn passive returns:

  1. Get transaction fees by providing assets to the Uniswap market
  2. Obtain SNX tokens by providing liquidity for sETH/ETH trading teams
  3. Get transaction fees by providing DAI or USDT for the CRV market
  4. Obtain deposit rates by depositing assets in the Aave, Compound, Fulcrum or Dydx lending market

iearn V1 is a simple lending market LP (Liquidity Provider), which switches between different liquidity pools every time a user deposits/withdraws.

So we started to discuss with CRV to launch a liquidity pool that automatically switches yield (yield switching pool), which later became CRV’s Y Pool. Y Pool combines the best advantages of iearn and CRV and becomes a pool that optimizes lending efficiency and automatically switches to obtain handling fees.

When you trade on, you are actually trading y tokens, such as yDAI, yUSDT, etc., but the pool itself will realize that yToken is exchanging tokens, and then deposit/withdraw the underlying token assets .

Then, we started to discuss with SNX again, because they are about to start their own stablecoin trading pool (for sUSD), and we added another layer. In this way, the liquidity provider can get yToken (deposit income), fees, plus SNX rewards.

So at that time, we already had the ultimate combination: the token that automatically switches the passive rate of return + transaction fees + project liquidity incentives.

Such a good time has become a thing of the past.

Then various projects began the war to incentivize liquidity. Compound fired the first shot with their COMP token and everyone swarmed. Balancer soon launched BAL, mStable launched MTA, Fulcrum launched BZX, and Curve is ready to launch CRV. (Translator’s Note: The core of these projects’ incentive liquidity models are similar: according to the amount of assets provided by users, additional protocol native tokens are obtained proportionally; on August 16, 2020, Curve launched CRV.)

However, this makes Yield Farming more complicated. It is not enough to switch options based on the deposit rate.

Now, the strategy will be complicated like this:

  1. Store DAI in compound and store cDAI in Balancer. Earn COMP through DAI, earn BAL through cDAI, plus the deposit interest rate available for DAI, and the handling fee of cDAI in the Balancer trading pool.
  2. Deposit DAI into curve, and then deposit curve token into Synthetix Mintr exchange. Earn CRV through DAI and SNX through curve token; plus the transaction fees available in the curve trading pool.
  3. Store DAI in mStable, and store mStable in Balancer. DAI can get an interest rate, and mStable token can get BAL in the Balancer agreement; in addition, it can earn commissions from the trading pool of Balancer.
  4. Save USDC in Maker, cast DAI, and repeat options 1, 2, 3.

And the above strategies are just some examples. A few weeks ago, the best strategy was to borrow BAT from the Compound market; now it is just a day when Compound is used as DAI. But next week, maybe it will be participating in Curve’s SNX pool.

The common problem faced by all the above strategies is that the meaning of these strategies is based on the value of COMP, BAL, MTA, SNX, CRV, etc. The prices of all these tokens will fluctuate. This also means that all these strategies must rely on price information transmission mechanisms. At the time of writing, there is no price information transmission mechanism for COMP, BAL, MTA, SNX, and CRV, unless you use the price in the Uniswap trading pool or the Balancer trading pool as an index; but once you use it, prepare your own Liquidity is sucked up by lightning loans.

The purpose of this article is to tell you that Yield Farming has become very complicated, and we expect it will become more and more complicated in the future. So we need to provide a new product, not simply to choose between these options, but to cultivate new options (instead of trying to choose between these options, seeds these options).

We already have ideas.

Starting from the next article, we will explain the solution in detail.

Original link: Translation: Ajian

Automated market makers with more profitability

Let’s start with a few basic examples:

Assuming you hold BAT, you have the following options:

  1. Deposit BAT in Compound to earn deposit interest and governance token COMP
  2. Deposit BAT in Aave to earn interest
  3. Sell ​​50% of BAT, use the money to buy ETH, deposit BAT and ETH into Uniswap’s BAT/ETH liquidity pool, earn handling fees, and bear impermanent loss.
  4. Sell ​​50% of the BAT, use the money to buy ETH, deposit BAT and ETH into the balancer’s BAT/ETH fund pool, earn handling fees and governance token BAL, and bear impermanent losses.

To get more complicated:

Deposit BAT into Compound, get cBAT, deposit cBAT and ETH into the balancer’s cBAT/ETH fund pool, earn handling fees and BAL, and bear the impermanent loss. On the surface, you think you are earning interest income from COMP and cBAT.

In fact, it is the balancer’s fund pool that earns COMP (not you), and the balancer’s fund pool is also earning cBAT (this part of the income will be obtained by arbitrageurs, so strictly speaking, what you earn is transaction fees. Instead of cBAT’s interest income). Although your investment strategy seems very wise, the final return is similar to directly depositing BAT and ETH into the balancer’s fund pool.

From this, we can find the following problems:

  1. The liquidity pool (not the liquidity provider) earned incentive tokens, such as COMP, BAL, etc.
  2. The liquidity pool (not the liquidity provider) earned the deposit interest of the token
  3. You must sell 50% of the BAT to provide liquidity for the pool (this is very important to our solution and will be discussed in a dedicated article)

From the above points, we can see that the existing AMM (Automated Market Maker) liquidity pool cannot meet our needs, so we need an AMM that is more profitable.

Supporting Aave tokens (aToken) is very easy. aToken supports a function called redirectInterestStream, which allows you to configure an address to receive interest. However, this means that the interest you earn is not calculated with compound interest.


Although the value of Compound Token (cToken) can grow based on its supply index, it is precisely because of this that these tokens are difficult to manage. This requires AMM to be able to perceive the basic value of cToken, not the value of cToken. Therefore, all swap transactions and quotation verification must measure the basic value, not the value of cToken itself.

The scheme that applies to cToken also applies to aToken, and solves the compound interest problem.

With the introduction of this change, AMM can conduct transactions between BAT/ETH token pairs while holding cBAT or aBAT.

The scheme designed for COMP is very simple. We measure the change of COMP balance according to each change of internal balance (cBAT) and assign an index to it.


However, we hope to support all tokens that may be added in the future and redistribute them when the balance has not changed. Therefore, we have modified the above content, can be applied to any token, and added an address lookup function for the core token.

The above is the first part-AMM with perceivable income, which allows liquidity providers to earn interest from the lending market that offers the highest interest rate, while obtaining incentive tokens (for example, COMP).

The next article will describe in detail how we can help you avoid selling 50% to buy another token when you only hold one token.

Original link: Translation: Min Min


Before explaining the next piece of content, we need to understand stablecoins.

Why is 1 USDT worth 1 US dollar? Simply put, if I hold 1 USDT, I can ask the issuer Tether to exchange 1 USDT for 1 US dollar. Therefore, if the price of USDT drops to 0.9 US dollars, I will find ways to buy USDT and convert it to 1 US dollar for arbitrage until its price returns to 1 US dollar. If the price of USDT rises to $1.1, I will find ways to “cast” USDT with U.S. dollars, and arbitrage from it until its price returns to $1.

The same is true for USDC and its issuer Circle, as well as TUSD and its issuer Trust.

What about DAI? DAI is backed by ETH, not U.S. dollars. We can provide 100 USD worth of ETH, and then mint 100 USD worth of DAI (actually only 66 USD worth of DAI can be minted. This is the way the clearing system maintains the stability of the DAI price, but for simplicity, suppose the guarantee rate is 100 % .)

If the price of 1 DAI is 1.1 US dollars, we can use ETH to mint DAI, and then use DAI to exchange for ETH. Suppose you used 1.5 USD worth of ETH to mint 1 USD worth of DAI. Now, the value of this DAI has become 1.1 US dollars, you can exchange it into the equivalent ETH, which is still 0.4 US dollars lower than the value of your pledge. (This is why DAI is sometimes decoupled from the US dollar).

Solving the above problems is easy, isn’t it? As long as we can mint 1 dollar worth of DAI with 1 dollar worth of ETH. The problem here is that ETH itself is volatile. If the price of ETH drops by 1%, the entire system will be unstable because there is not enough ETH to pay for DAI.

This is why companies such as Tether will get so many lawsuits. Tether claims that the USDT it issued is backed in full 1:1 in U.S. dollars. That is to say, if all USDT holders request Tether to redeem at the same time, can Tether come up with enough U.S. dollars? This is the key issue to ensure the stability of the system: when everyone asks for payment, the system can always provide sufficient basic assets.

Therefore, we designed a new type of stablecoin (we know that there are enough stablecoins of the same kind, but technically speaking, ours is different). What we designed is the AMM (Automatic Market Maker) transfer mechanism.

Whenever we create a new uniswap liquidity pool, we need to provide two tokens of equal value. Suppose you provide BAT worth 1 USD and ETH worth 1 USD to create a BAT/ETH liquidity pool. At this time, someone provided DAI worth $1 and ETH worth $1 to create a DAI/ETH liquidity pool. If you want to use BAT to exchange DAI, you must first exchange 1 USD worth of BAT in the BAT/ETH pool into equivalent ETH, and then exchange into the equivalent DAI in the DAI/ETH pool.

In the above example, ETH only played the role of value transfer. As long as 1 ETH = 1 ETH, BAT worth 1 USD = DAI worth 1 USD.

After introducing value transfer assets, we can do some interesting things. Assuming that you provide 1 USD worth of BAT to this new AMM transfer mechanism, you can create an equivalent value transfer token. If someone else provides DAI worth $1, they can also create an equivalent value transfer token.

Some interesting things will happen next: 1. We only need to provide liquidity for one token. 2. The value of the value transfer token is equal to the sum of the values ​​of all tokens in the system. 3. If the trader injects into the system For more A tokens, B tokens of the same value must be taken out to comply with Rule 2. 4. If the value of the value transfer token is higher than the total value of all the tokens in the system, the trader will sell the value transfer token to the system and withdraw other tokens, thereby complying with Rule 2.

We have launched this liquidity provision system called Stable AMM. The system can obtain higher profits while ensuring internal stability.

Original link: Translation: Min Min

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