Occam.fi
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Occam.fi

OCX LM Campaign 101 and Why You Should Fasten Your Seatbelts

We are proud to announce the start of our huge liquidity mining campaign. The OccamX team is committed to incentivizing our valued liquidity providers fairly, and minimize their exposure to the inherent risks involved with this otherwise highly lucrative DeFi mechanism.

  • Our highly anticipated mining campaign will begin in week 2 of April, fasten your seatbelts as there will be surprises along the way!
  • There are synergies emerging on the DeFi landscape of Milkomeda that will enable us to do something that few have done before.
  • We will be providing farming opportunities on liquid, stable pairs — allowing for maximum return on investment, whilst minimizing exposure to impermanent loss.
  • Rewards will be denominated in our native DEX governance token, OCX — this provides a reward that is both liquid and fundamentally sound, ensuring your rewards are just as valuable when you claim them, as when you earned them.
  • And remember — it was all a part of the plan. Follow the Monk.

This article will explain what a DEX does, why it requires liquidity providers, and the benefits and risks of providing liquidity to an AMM-based exchange.

Introduction

The first Decentralized Exchanges (DEX) were created as powerful tools enabling permissionless price discovery.

Whilst DEXs solved in principle the problem of censorship in trading engines as they are not governed by any centralized authority — they rely on community governance instead. DEXs AMM-powered ‘matching engine’ is governed by bonding curves instead of central limit order books and is regulated only by the code, open-source and is community-audited. Every change to the system is subject to a ‘vendor lock’ and requires TVL migration to take effect. Of course, the above doesn’t apply to every DEX — but it does apply to the largest, and most popular of them.

With any AMM-based DEX, slippage and price stability are inversely (directly) proportional to liquidity that rests in its pools. The mission to amass liquidity for any given pool and for the DEX as a whole is driven by economic incentives, and whilst they differ across DEXs in implementation, the core idea remains unchanged. The core concepts involved are market-maker rebates and APYs; more liquidity inside the pools implies better prices for traders, and better prices bring higher trading volume to the DEX — thereby rewarding LPs in trading fees. Beautiful, game theoretical — you might imagine it being almost a financial utopia. But, there is a catch; as with anything else.

The risk of providing liquidity is that of ‘impermanent loss’, which we explain below.

In DeFi, impermanent loss refers to the loss in value when investing liquidity in a liquidity pool compared to simply holding the tokens in your wallet. This event occurs when the price of a user’s tokens changes compared to when they deposited them in a liquidity pool. The larger the change is, the bigger the impermanent loss.

Why (im)permanent? Because if we assume a mean reversion in asset returns, their prices could return to the initial values (i.e. when liquidity was deposited). In this case, the impermanent loss is zero. But what if the assets never return to their initial prices? Well, then your unrealised impermanent loss becomes a permanent loss when you remove your liquidity and sell your tokens.

In general, the higher the asset volatility and the stronger the trend component, the higher the odds that impermanent loss will at some point become permanent. What kind of digital assets are characterized by extreme volatility and strong trend component? You guessed it — low market-cap assets with little fundamental value. Therefore, for such assets, providing liquidity is especially risky, and LPs need to be given stronger incentives. That’s how the concept of yield farming was born.

Let’s summarize:

  1. Yield farming can at the very least partially compensate liquidity providers for the risks inherent in providing liquidity to more risk-prone assets — in many cases providing a much higher return than would otherwise be possible.
  2. Being rewarded with highly volatile project tokens can be detrimental to both liquidity providers and the project itself, this occurs due to a heightened risk profile in relation to impermanent loss for LPs, and constant selling pressure for project tokens.
  3. When these factors are taken into account we can determine the safest and most valuable environment for liquidity provision would be one in which the pool itself is highly liquid, the volatility is stable, and the rewards are denominated in DEX governance tokens.
  4. At OccamX, we are attempting to check every box when it comes to rewarding our liquidity providers in a meaningful manner, with the minimum risk of impermanent loss and maximum ROI.
  5. Our farming campaign begins in the second week of April, at which point you will be able to earn yield across the hottest farms on Milkomeda — so be ready, early birds catch the worm!

OccamX and risk management

The OccamX protocol will pool together established, mature assets into farmable pairs. An example of this would be a pool of ADA/USDT — due to the highly liquid nature of these assets and their relatively low volatility, the risk of impermanent loss for liquidity providers becomes negligible.

Beyond this — OccamX offers yield farming on these low-risk pairs, and by allowing the ability to stake their liquidity tokens we can further incentivize liquidity providers by rewarding them with the OccamX platform’s native token (OCX), in return for providing stable liquidity to the platform.

How do OccamX’s tokenomics work?

Amongst the many pools available on OccamX, our liquidity providers deposit their liquidity in the form of asset pairs. Some of you will stake the LP tokens you receive and become liquidity miners, whilst others will decide to simply enjoy your share of trading fees from the pool you have deposited to. In the case that you decide to stake your liquidity tokens, you should know that each pool is assigned a unique weight that defines how much of the OCX token’s supply the pool will receive as rewards for miners.

New OCX token supply is continuously released which results in an inflation rate. That inflation is distributed pro-rata across the users based on the amount of LP tokens they have staked, and the previously mentioned weight of the pool they provided liquidity to.

With this mechanism, our native OCX token’s supply is distributed to our valued liquidity providers, and thus an incentive is created for LPs to become LMs, as the assets that are paired together are either stable or well-established enough to be considered low risk regarding Impermanent Loss.

.. For those of you who made it to the end, there is yet more to be announced that will turn OccamX’s liquidity mining campaign into something truly special, this will be revealed tomorrow — be prepared.

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