Ecosystem-Owned Liquidity: Redefining LP Asset Management

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Mitosis Blog

5 min readMay 2, 2024

Liquidity War: Protocols and LPs

Total Value Locked (TVL) is the major barometer of decentralized protocols’ public interest and usage level. The relationship between the two participants is plain and simple: LPs allocate assets to protocols offering yield. LPs are inclined to maximize their capital efficiency and return. Protocols must actively market their competitive advantage to host more assets, scale, and roll out more attractive features to further increase and retain their TVL.

The result of such a dynamic is what we would like to call the Liquidity War, in which protocols compete for more liquidity. While this is nothing new in DeFi, the imminent multi-chain transition brings additional layers of depth. LPs have more options across multiple networks to deploy and manage their capital. Protocols leverage different narratives of different networks to drive TVL growth. As the LP<>protocol dynamic becomes increasingly complex in a multi-chain setting, Liquidity War is poised to advance to the next stage.

Mitosis proposes a novel Ecosystem-Owned Liquidity (EOL) concept suitable for the upcoming multi-chain DeFi. In this article, we’ll learn what EOL is, how it works, and its impact on taking on-chain asset management to the next level of maturity.

The Challenges for Individual LPs

Let’s examine how the current LP<>protocol setup impacts the LPs.

1. The multi-chain transition presents choice overload

More Layer 2s mean more options to deploy capital. The ever-expanding yield opportunities impose a steeper learning curve on LPs, who must consider the time value of money for optimal capital allocation. Also, LPs bear the transaction cost of moving around their assets cross-chain.

2. Opaqueness of the expected profit of the point-based reward system

It’s difficult to gauge the expected return based on points. Protocols decide LP reward distribution after hosting LP assets. This unilateral, opaque protocol<>LP relationship makes LPs vulnerable to suboptimal capital allocation risk.

3. Institutional liquidity can have an asymmetric advantage

The intense competition for TVL compels protocols to rely on business-to-business deals with institutional LPs. Such institutions can negotiate for better terms with protocols in return for committing a relatively large volume of liquidity. Absent such capital-based leverage, individual LPs risk getting the short end of the stick during the reward distribution.

Introducing Ecosystem-Owned Liquidity

Mitosis proposes a paradigm shift: from individual LPs seeking opportunities to opportunities seeking LPs. Ecosystem-Owned Liquidity redefines the legacy LP<>protocol relationship to maximize LP capital efficiency in the upcoming multi-chain setting. Let’s first take a look at how EOL works:

1~3: The Mitosis Ecosystem

1. The Mitosis Ecosystem comprises an EOL Vault on each network and the Mitosis L1 chain. For now, let’s focus on the EOL Vault.

2. LPs on various networks deposit their liquidity into the EOL Vaults of their choice. The EOL Vaults are on every network that Mitosis supports, and LPs can choose any network.

3. The Mitosis Ecosystem decides how to allocate pooled liquidity across various yield sources. Each EOL Vault deposits its liquidity into reward opportunities within its respective network. Here is how the decision-making process works:

4~7: The Liquidity Allocation Governance

4. Protocols interested in the Mitosis EOL can initiate forum discussions. Proposals include information such as the protocol's description, security profile, and details of its offering.

5. Forum Discussion: All Mitosis participants, including LPs and protocols, are encouraged to share their opinions in the forum discussions. These discussions will focus on topics such as the safety of the protocol and the reasonableness of its offerings based on the proposal.

6. Signaling Proposal: LPs vote on the Signaling Proposal to determine whether the Mitosis Ecosystem will opt-in to provide a portion of EOL to the protocol.

7. Gauge Proposal: If a protocol passes the Signaling Proposal, the protocol enters the list of protocols in the Gauge Proposal. LPs vote on the listed protocols to determine what portion of EOL each protocol will receive.

8: The Reward Distribution

8. Based on the result of the Guage Proposal, the EOL Vault distributes its liquidity to the protocols. The earnings of the EOL accumulate in the EOL Vaults. Mitosis distributes rewards to all Mitosis LPs, regardless of the network they chose for their deposits. This approach ensures that all LPs enjoy multi-chain yield exposure.

How EOL Reinvents LP Asset Management

The Mitosis ecosystem and its EOL propose a new LP<>protocol interaction structure. Specifically, they solve the three challenges described above.

1. Multi-chain asset management by default

Becoming a Mitosis LP is synonymous with instantly gaining optimized multi-chain yield exposure. Mitosis LPs join forces and leverage each other’s expertise across multiple networks. Their collaboration leads to a collective knowledge pool that significantly increases the efficiency of researching and identifying outstanding yield sources. Also, Mitosis LPs earn profits from multiple networks without manually allocating assets using the costly legacy cross-chain solutions.

2. Transparent and symmetric information

EOL compels protocols to present clearly defined yield metrics to the Mitosis LPs upfront. Protocols must compete with each other to get their maximum EOL allocation. Naturally, protocols have direct incentives to disclose their intent and offerings in detail to increase their support level within the EOL governance. EOL creates a highly efficient LP<>protocol market where parties make informed decisions based on transparently shared information.

3. Level playing field

The EOL governance relocates the legacy of B2B negotiations to the public arena. Using the pooled capital, EOL imbues leverage against protocols for all types of Mitosis LPs. EOL reallocates the exclusive, asymmetric benefits enjoyed by the few to all Mitosis LPs seeking participation in multi-chain yield opportunities. The resulting market efficiency and fairness scale as EOL grows, creating a virtuous cycle that takes on-chain yield farming to the next level of maturity.

Coming Up Next: EOL Forum

EOL Forum is launching soon to provide a public discussion arena that will shape Mitosis’ future. Current and future Mitosis LPs can freely collaborate, share knowledge, and propose ideas that benefit all EOL participants. It’ll also be a place for protocols to market themselves and gain support from the Mitosis ecosystem. Stay tuned for upcoming announcements.

Join the Mitosis Community

Please follow our journey and provide your thoughts on our Discord and X. We’ll run regular AMAs & podcasts and provide other essential updates to keep you in the loop. Interested in how Mitosis works? Take a deeper dive into our technical documentation.