Ondo and Fei’s Liquidity Service Launches with $100M in Committed Capital
Ondo Finance and Fei Protocol have partnered with several cutting-edge DeFi protocols to help them increase their decentralized exchange liquidity. The Liquidity-as-a-Service (“Laa$”) offering allows protocols to phase out longstanding liquidity mining campaigns, which many argue is unsustainable, costly, and leads to unwanted volatility. Fei’s initial commitment of $50M to the program has now been matched by $50M in commitments from partners for a total $100M that will be deployed into the program over the next few weeks. The first of these vaults — from Universal Market Access (UMA), Gro Protocol (GRO), and ShapeShift (FOX) — were deployed yesterday, with NEAR (NEAR) launching imminently in the coming days. Several more partners will be announced soon. These vaults have deployed liquidity into brand new liquidity pools on Uniswap, establishing dollar-denominated liquidity for participants’ tokens.
You can find these new vaults here.
These new vaults will help bolster liquidity for participants’ tokens and serve as a proof of concept for future vaults that will be available to the community to deposit and earn trading fees. The increased liquidity will mitigate trading slippage and volatility, as well as reduce the risk of price manipulation and impact.
About Liquidity-as-a-Service
Liquidity-as-a-Service (“Laa$”) is an offering from Ondo and Fei to make it possible for projects issuing tokens to increase the liquidity in their native tokens on decentralized exchanges by providing liquidity themselves. With Laa$, a project can deposit its token into an Ondo liquidity vault with a flexible duration, and Fei will match those deposits with an equivalent amount of FEI to form a liquidity pair.
For more information on Ondo’s partnership with Fei, check out Joey’s write up here.
Ondo Advantages
Ondo provides several advantages for token issuers. With Ondo, token issuers earn trading fees and rewards which reduce (or even negate) impermanent loss (IL) risk and the cost of capital.
Ondo’s vaults represent granular building blocks upon which customizable liquidity solutions and return profiles can be created. With small adjustments, Ondo vaults are well-suited to facilitating direct listings, establishing the first liquidity for a token. Direct listings could eventually replace or complement IDOs.
Ondo’s goal is to build infrastructure that will enable servicing users in a largely automated, composable, and customizable way.
Background on Liquidity Mining
At a high level, liquidity mining (“LM”) is a way for a protocol to bootstrap its growth and liquidity by rewarding users with tokens for providing liquidity or other services for the protocol.
Why do projects want to increase liquidity in their own tokens?
Adoption: Lack of liquidity makes it difficult for users to acquire and adopt a project’s token. Large value-add investors, in particular, can only buy tokens from projects with ample liquidity.
Volatility: Tokens with low liquidity have highly volatile price behavior, as their price is more easily moved by buy and sell pressure. High volatility in a token can deter many investors.
Resistance from manipulation: The price of tokens with low liquidity can be easily manipulated. Price manipulation is bad for a project’s users and investors.
Exchange requirements: Exchanges will delist tokens with low liquidity for some of the above reasons.
What are the limitations of Liquidity Mining? Why are protocols looking for innovative, new solutions to liquidity?
LM is an explicit cost born by the project instituting it. If a project’s sole path to establishing liquidity in its token is through LM, then when the LM rewards dry up, so does the liquidity.
One of the perceived benefits of LM is that it increases “adoption” of a protocol. However, capital that LM attracts is highly mercenary.
“A large majority of farmers appear to exit within the first 5 days of entering a farm, and half of all farmers never stay beyond 15 days. […] A whopping 42% of yield farmers that enter a farm on the day it launches exit within 24 hours. Around 16% leave within 48 hours, and by the third day, 70% of these users would have withdrawn from the contract. This is certainly due to how reward emission rates (APR) usually drop block by block, and how rewards get diluted over time as more users enter the farm. Capital is indeed mercenary in DeFi, and users would rather put their capital to work elsewhere.” Nansen Research
Analysis of Compound’s liquidity mining, which was shown to be extremely mercenary:
Only 1 of the top 100 COMP liquidity mining participants has actually participated in Compound governance; only 7 have kept >50% of the COMP they received from liquidity mining. Source
While LM increases a project’s liquidity, which has a dampening effect on volatility, there are second-order effects from LM that actually lead to dramatically increased volatility over the long run. Early on, users rush to buy a token with a new LM program in order to receive the LM rewards. However, once the amount of assets inside of the LM program levels off, this buying pressure disappears and only the selling pressure from the new tokens being distributed through LM remain. This sell pressure leads to gradual declines in a token’s price.
About Ondo Finance
Ondo Finance is connecting and servicing investors and token issuers in DeFi with on-chain investment banking services. Ondo is being developed by a team of traditional banking veterans and DeFi experts. The team includes alumni from Goldman Sachs Digital Assets, Facebook, BadgerDAO, Snap, private equity funds, hedge funds, and various venture-backed start-ups.
