When will the DeFi revival come? Degen’s “on-chain mining secrets”

Author: FC, Partner of SevenX Ventures Source: X, @FC_0X0

Is the DeFi craze coming back? It's time to get ready.

This is the "on-chain mining secrets" summarized by three "DeFi Summer big winners" after two cycles of mining. It makes it clear "how to choose the target" and "what issues you should care about".

Why is the growth of on-chain mining weak in this cycle?

Smrti Lab Co-founder 0x992 @0x992eth has been paying attention to and participating in DeFi since 2018. In the DeFi Summer of 2020, he started to be a Liquidity Provider and established his own DeFi Fund.

He believes that the core of the 2020 cycle was the liquidity overflow of DeFi Summer, with nearly 800 projects issuing coins, and almost 2 projects listing coins every day in those two years.

There is an obvious problem with the so-called Point Summer in this cycle, that is, everyone dares not do real Token Generation, and has not figured out what the coins unlocked for four years should incentivize, and has not figured out how to maintain a four-year effective innovation as a bribery or vToken.

He also mentioned that the concept of Point Summer's income is relatively vague, and the core problem is the lack of buying liquidity, which is specifically manifested in two aspects: 1) Unable to find cyclical income 2) DeFi Lego's lack of innovation and inability to attract new users

In his personal opinion, Liquid Staking is actually a field that is very consistent with market demand and has cash flow and TVL growth potential, but the key lies in how to unlock the income mechanism to continuously promote market prosperity.

Will there be another "DeFi Summer"?

Jimmy @0xJimmyYin first entered the industry by developing Dapp, and later worked on DEX. In 2020, he founded iZUMi Finance, focusing on providing LaaS for multi-chain ecosystems and providing projects with a variety of services including liquidity.

Jimmy mentioned that in the last round of the market, a large amount of OTC liquidity distributed income layer by layer through the complex design of Tokenomics, thus creating a huge wealth effect and attracting a steady stream of new players. Many MMs transferred funds from many centralized strategies to the chain. The current popular trend is to move on-chain funds back to centralized platforms for RWA operations, which reflects the lack of on-chain income.

Jimmy believes that the last round of DeFi has left significant value for the entire financial field, and real user demand still exists. For example, although some projects have not issued tokens, they have still created practical usage scenarios through interest rate arbitrage incentives and other means.

If the current market can remain stable, the inflow of new funds will not be in vain, but if some projects eventually return to zero, lacking real business and alternative value, it will be difficult to re-stimulate user interest in the future.

Therefore, whether product innovation can reach the level of the previous round of DeFi will be the key factor in determining the value of these Paper Money in the future.

How to choose the timing and target of mining?

Neo @0xNeoSu has been an angel investor since 2018 and founded Arcane Group in 2011.

Neo believes that the essence of on-chain mining is to create transaction liquidity and TVL for DeFi projects and help projects to cold start.

There are two stages in which on-chain mining should be participated in: 1) Cold start stage 2) Mid-to-late stage, that is, the stage when the token already has a clear purpose and certainty

The middle stage, that is, when the project just issues coins and completes incentives, is usually the most difficult period. At this stage, investors need to focus on the long-term planning of the project, the help of token incentives to the ecosystem, and whether the project's business model can support the unlocking period of the next 4 years.

When evaluating which projects are worth participating in mining, Neo emphasized two key factors: 1) Diversity of income sources and richness of protocols 2) The ceiling of the project should be high enough, that is, whether the project has high-quality endorsements, resources and liquidity providers (LPs), which directly affect the valuation and long-term development potential of the project.

Neo mentioned Berachain, saying that it is a project that performs well in terms of liquidity. Their Points model clearly tells users how many tokens they can get in the end, while many LRT projects have problems, often only giving points, and there is no clear token distribution rules or revenue model

As a liquidity provider, what should you care about?

0x992 believes that for Liquidity Provider, the core issues they are concerned about are:

1) How much return can be obtained from the project at the end of the investment period. The transparency and certainty of this result are the key to the success of the project. Whether it is a BTC-based LP or other forms of LP, they will pay attention to the ratio of invested and recovered assets.

2) Strategy transparency This is one of the important criteria for ensuring returns. LP needs to know how the funds work, especially when multiple strategies are executed, it is crucial to understand when each part of the funds generates what kind of returns.

3) Liquidity and strategy capacity Not only should we consider (such as APY or APR), but we also need to pay attention to the liquidity of assets, especially the ability to quickly withdraw assets when the market fluctuates or large-scale funds withdraw. Liquidity management and strategy capacity can protect the safety of investors' funds under extreme market conditions and prevent "black swan" events.

Ultimately, all judgments come down to one core question: the rate of return on the coin. No matter how the project promotes complex yield indicators (such as DPI, APY, etc.), LPs are always most concerned about how much BTC, ETH or other crypto assets they can get back. The above factors, actual returns, liquidity and transparency, are the cornerstones of the long-term success of DeFi Farmers and project parties.

Where does the income from on-chain mining come from?

Jimmy explained that the sources of income are mainly divided into two categories: transaction fees and interest.

Participants in transaction fees are divided into three categories based on their motivations: 1) Ordinary users who pay Gas fees 2) Suppliers or Trading Bots who use the time difference between on-chain and off-chain information for arbitrage 3) Wool parties or scientists who obtain airdrop rewards through on-chain transactions

The typical representative of interest is the lending protocol. There are two main forms: 1) Early BTC and ETH mortgage lending income 2) Staking income after Ethereum switched to PoS. For example, Lido will attribute 10% of its income to the protocol to support the real income of the underlying layer. In addition, PointFi projects such as Blast, Manta and Merlin also provide income based on single-coin staking, and you will get income as long as you deposit assets.

At the same time, he also pointed out that the real income sources off-chain, such as USDM and the Federal Reserve, and the income of CeDeFi market makers are also important supplements.

Neo believes that the real income of DeFi projects mainly comes from two forms: one is the interest of a single currency, and the other is the value correspondence between the same assets.

Popular assets are usually a combination of BTC to BTC or ETH to ETH, because there is no trade difference between such assets, thus avoiding the interference of contract risks and other external complex factors.

He pointed out that how to effectively increase the value of the currency through the swimming pool is a difficult point. Although liquidity does not fluctuate every day, asset prices may increase significantly when major events occur in the protocol. Therefore, investors hope that the assets they hold are not only safe, but also have the potential to be held for a long time.

The road to trading is lonely. I hope to help everyone find partners with the same frequency. See you at the next event.