TL;DR:
- Liquidity mining (aka yield farming) is a reward mechanism where liquidity providers (LPs) earn incentives for staking positions.
- In Concentrated Liquidity Market Makers (CLMMs), a conflict exists between staking and the need for frequent repositionings. Gnoswap adopts Warm-up Periods to remove unstaking periods to offer flexibility to LPs while also incentivizing long-term staking.
1. What’s Liquidity Mining?
Liquidity mining, also known as yield farming, is a reward program that provides token incentives for liquidity providers (LPs) who stake their capital to the platform for their commitment. This mechanism is widely utilized by DeFi platforms as a way to bootstrap liquidity by drawing more LPs with additional revenue streams.
The liquidity built up by LPs results in better pricing and lower slippage, creating a competitive market that attracts traders who pay fees to LPs on swaps. This creates a virtuous cycle that fosters the sustainability of the platform.
Liquidity mining is especially powerful when combined with governance tokens. It allows platforms to gradually achieve decentralization by distributing the ownership of the protocol over time to its most active users: the LPs.
Consequently, liquidity mining has become an integral part of DeFi. However, the debut of Concentrated Liquidity Market Makers (CLMMs) has presented a challenge for incorporating liquidity mining into the protocol.
2. Why Traditional Liquidity Mining Doesn’t Work With CLMMs
The purpose of the CLMM is to allow LPs to concentrate the underlying capital of their position into a specific price range to increase capital efficiency, which boosts both the liquidity and fee rewards. The thinner the range, the higher the capital efficiency. However, the problem here is that the position becomes inactive once the price moves out of its range. As a result, CLMM requires LPs to frequently adjust their positions by withdrawing their liquidity and re-depositing it in a new range.
This creates a conflict when combined with traditional liquidity mining, which involves the lock-up of positions to reward long-term liquidity provision. Any kind of unstaking period would prevent LPs from readjusting their price range, which means that their position will be forced to remain out of range, earning no rewards. This could disincentivize LPs from choosing a thin price range, which undermines the whole purpose of concentrated liquidity.
As a solution, Gnoswap adopts Warm-up Periods, a novel mechanism that deviates from traditional staking approaches to offer flexibility, while encouraging long-term liquidity provision.
3. Warm-up Periods
The Warm-up Period is a unique liquidity reward mechanism of Gnoswap that entirely removes unstaking periods, but instead applies a linearly decreasing penalty to newly staked positions. The penalty gradually decreases over time in 4 different stages.
- Day 1~5: Only receives 30% of the max rewards
- Day 6~10: Only receives 50% of the max rewards
- Day 10~30: Only receives 70% of the max rewards
- Day 30~: Receives the max Rewards
The high volatility of crypto will often force LPs who choose thin price ranges to adjust their positions. For each adjustment, the staking progress of the position will be reset, reapplying the highest penalty. All of the rewards deducted by penalties are rolled over and added to the reward pool of the next block.
This creates trade-offs for two different types of LPs. Those who opt for a short-term strategy by choosing a thin range will earn higher swap fees while foregoing some staking rewards. On the other hand, those who opt for a long-term strategy by choosing a wide range will earn fewer swap fees due to low capital efficiency but earn higher staking rewards by avoiding penalties.
All in all, Warm-up Periods provide flexibility for short-term LPs, while rewarding the loyalty of long-term LPs with higher staking incentives.
Below is a sneak peek of your staking experience on Gnoswap.
The staking dashboard will allow you to track your progress, providing valuable information such as the requirements to reach the next stage, the value of your position, the rewards available to claim, and the estimated APRs. It is designed to make staking management as simple and intuitive as possible.
4. Learn With Examples
Below are examples of how Warm-up Periods affect staking rewards in different scenarios.
All of the examples assume the following settings:
- Daily $GNS Emission for the Pool: 1,000 GNS
- Alice’s Pool Liquidity Share: 10%
- Bob’s Pool Liquidity Share: 20%
- Carol’s Pool Liquidity Share: 30%
Example 1)
Alice is an aggressive LP who chose a thin price range. After 7 days of staking, the market price moved out of her range today, causing her position to become inactive. Alice was forced to reset her progress by readjusting her price range, causing her eligible staking rewards to drop from 50% to 30%.
Alice’s Daily Rewards Before (on the 7th day): 1,000 GNS * 10% * 50% = 50 GNS
Alice’s Daily Rewards After (restaked, so on the 1st day): 1,000 GNS * 10% * 30% = 30 GNS
Although her staking rewards have dropped by 20 GNS, her thin range will result in much higher swap fees compared to positions of similar value with wider ranges.
Example 2)
Bob is a passive LP who has been staking for 29 days without any repositioning. Despite his share of 20%, he is only eligible for 70% of his rewards.
Bob’s Daily Rewards: 1,000 GNS * 20% * 70% = 140 GNS
Bob will receive a daily staking reward of 140 GNS for today. However, starting tomorrow, he will advance to the next tier, where he will be eligible for his maximum reward of 200 GNS.
Example 3)
Carol is an adventurous LP that experiments with various strategies. A quarter of her position has been staked for 2 days and the rest has been staked for 9 days, applying two different multipliers to her rewards. Instead of earning 300 GNS for 30% of her share, below is what she will actually receive:
Carol’s Rewards of the Quarter of Her Share: 1,000 GNS * 30% * 0.25 * 30% = 22.5 GNS
Carol’s Rewards for the Rest of Her Share: 1,000 GNS * 30% * 0.75 * 50% = 112.5 GNS
Carol’s Total Daily Rewards: 22.5 GNS + 112.5 GNS = 135 GNS
Although Carol has more share in the pool than Bob, she will be receiving fewer rewards until she removes her penalties by keeping her positions staked.
5. Closing
Liquidity mining is an effective method for liquidity bootstrapping and decentralization of DeFi protocols, as exemplified by the success of industry leaders such as Uniswap, SushiSwap, and Curve. However, the industry has yet to find an elegant solution for resolving the conflict that’s involved in locking up positions with highly concentrated ranges. The traditional approach of simply eliminating unstaking periods falls short, as it fails to provide a way to reward the commitment of long-term LPs while potentially offering disproportionate token rewards to aggressive LPs who are likely to be more transient, and easily driven away by high yields from other DeFi platforms.
Gnoswap’s Warm-up Periods offer a viable solution to this challenge by enabling flexibility for aggressive LPs while limiting their exposure to the protocol’s token, and at the same time, incentivizing the loyalty of long-term LPs to foster a sustainable reward mechanism.
About Gnoswap
Gnoswap is the first CLMM (Concentrated Liquidity Market Maker) DEX built on Gno.land using Gnolang to provide streamlined access to DeFi. The trader-centric interface of Gnoswap delivers valuable insights into the market and simplifies the CLMM experience by abstracting away its complexities. In addition, Gnoswap enables flexibility in liquidity staking via the novel Warm-up Period mechanism to maximize capital efficiency and rewards for liquidity providers.
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