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Bancor was the first DEX project to implement the AMM model, but the first project that was truly successful in practice was Uniswap. At present, the most important area of DeFi is DEX, and the most popular mode in DEX is the AMM mode, which is the automatic market-making mode. This has been mentioned many times before. You can refer to the previous article of Blue Fox Notes.
Uniswap without token incentives loses an engine
Yesterday, Sushiswap's liquidity migration was successfully realized, successfully leveraging over 70% of Uniswap's liquidity, and becoming the most liquid DEX today. Its current liquidity reaches US$1.33 billion, and it was only two weeks old. , And Uniswap's liquidity is now less than 35% of Sushiswap. Uniswap fell from the most liquid DEX to second place in just two weeks. This is the "Game of Thrones" in the crypto world.
These practices fully demonstrated that Uniswap did not pay enough attention to the token economic system and the development of the community. During the two weeks that Sushiswap carried out the "liquidity migration attack" with great fanfare, it did not make any countermeasures.
This leaves a great opportunity for other swaps. This also shows that the current DeFi DEX is still in its early stages, and there is no absolutely unbreakable moat. Later various swaps also have opportunities. Even the moat of Sushiswap, which has just risen to the top of DEX liquidity, is not unbreakable. Because other Swap can use similar strategies to deal with SushiSwap, it can be said that SushiSwap just kicked off the DEX war.
To build a moat on DEX, it is necessary to mobilize the power of the community to the maximum, and it is necessary to design an economic incentive system that takes into account short-term rapid growth and long-term sustainable development. We will pay attention to more various swaps in the future. Today I’m talking about Miniswap’s exploration of DEX.
Miniswap's DEX exploration
The initial launch of Miniswap
As an AMM mode, Miniswap is similar to Uniswap's automatic market making mode. At present, Miniswap has just been launched for two days, with more than 20 million U.S. dollars in liquidity and more than 2 million U.S. dollars in trading volume. Among them, there are 9 token pools with a liquidity of more than 1 million U.S. dollars, and the main token pools ETH/USDT, MINI/ETH, LINK/ETH, YAMv2/ETH, etc., have a good cold start. This means that if it is not a large-scale exchange, the trading slippage of these token pairs will not be too high.
What is the difference between Miniswap and Uniswap?
The biggest difference between Miniswap and Uniswap is its token incentive mechanism. In the Miniswap ecosystem, there are three important participants. One is the liquidity provider, the second is the trader, and the third is the token holder. All three have incentives of interest in Miniswap.
First, let’s take a look. How does Miniswap treat liquidity providers differently from Uniswap?
Incentives for liquidity providers on Miniswap
Similar to Uniswap, the liquidity provider needs to deposit two tokens, such as ETH/SUSHI, into the token pool. When the user deposits 10 ETH, then according to the current price, the user needs to deposit 1190.66 sushi at the same time.
After there are two tokens in the token pool, traders can exchange them. For example, a user uses A token to exchange B token, where f is the transaction fee, N^A is the number of tokens that the trader tries to buy, and N^B is the number of tokens the trader has obtained.
Then the trader will get the number of token B according to the following formula:
The biggest difference between MiniSwap and Uniswap is that it provides liquidity providers with the incentive of token MINI. At present, there is a daily limit of 500,000 MINI tokens for liquidity providers to mine. According to the current MINI market price, there are currently 90,000 U.S. dollars for liquidity providers to capture every day.
In addition, Miniswap liquidity providers can also capture transaction fees, and their transaction fees are determined by the size of the proportion provided by the user to the liquidity pool.
Incentives for traders
In the DEX ecology, in addition to liquidity providers, traders are also important participants in the ecology. In order to form a positive cycle, Miniswap also introduced an incentive mechanism for traders. This is something Uniswap does not have yet.
Specifically, traders need to pay a certain percentage of fees after trading on Miniswap. However, according to the scale of the user's fee, Miniswap will return the user's MINI tokens. In other words, on Miniswap, not only the liquidity provider has mining revenue, but also the mining revenue as a trader.
This is helpful in attracting sufficient liquidity in the early stage of the project and is important for forming a positive trading cycle. Only a liquidity provider, without a trader, cannot generate the fees and benefits of the agreement. By providing token incentives for early traders, the cold start problem of traders can be solved to a certain extent.
At present, Miniswap's daily transaction mining revenue is consistent with the daily mining revenue incentive level of the liquidity provider, which is the upper limit of 500,000 MINI tokens. That is, according to the current price, there is a token reward cap of approximately US$90,000 per day.
Incentives for token holders
In addition to liquidity providers and traders, token holders can also align with the long-term benefits of the agreement. All MINI token holders can receive irregular dividends. This is also one of the biggest differences from Uniswap. On Uniswap, liquidity providers are more like mercenaries. After users provide liquidity and obtain fee income, once the liquidity is withdrawn, it has nothing to do with the agreement. In other words, the long-term benefits of the agreement have little to do with the liquidity provider itself, but with the incentive of the agreement token, the liquidity provider has the opportunity to capture the long-term benefits of the agreement. One of the performance of this income is that the value of the token increases as the transaction scale increases, and the other is that it can also receive additional dividends.
At present, Miniswap's dividend distribution method is that the Miniswap contract scans the number of MINI tokens in each wallet on the Ethereum chain, and at the same time, distributes irregular dividends according to the ratio of the number of MINI tokens in the user's wallet to the circulating MINI tokens.
So, where does the dividends come from?
First of all, a 0.3% handling fee can be generated in Miniswap transactions, of which the handling fee will be used to buy MINI tokens. Of these purchased MINI tokens, 50% of them will be returned to MINI token holders, which is the source of dividends. The remaining 50% of MINI tokens are burned. Since the total supply of MIN is 1 billion, that means that MINI is still a deflationary token.
MINI's value capture
The value of MINI ultimately mainly depends on the fees of its platform. The handling fee mainly depends on the size of the transaction volume of the agreement. The greater the transaction volume, the greater the handling fee. The more the processing fee, the greater the purchase of MINI, which will support its value.
In order to promote the increase of its transaction scale, one is to have a better user experience, especially in terms of transaction slippage. To have a low transaction slippage, liquidity providers need to provide more liquidity. With lower trading slippage, traders are also more willing to trade on Miniswap. In addition, the most important thing to guide the increase in transaction volume is to meet the user's token transaction needs. If some high-quality tokens can be mined and launched as early as possible, they may also have the opportunity to increase the transaction scale.
Ultimately, how high Miniswap can reach depends mainly on the depth of active participation of traders, liquidity providers and currency holders.
Miniswap and distributed finance
Miniswap is currently dominated by DEX. From its roadmap, it also tries to support various decentralized financial products. There are plans to introduce American options, American options insurance products, and finally cross-chain DEX transactions.
In the future, when a user purchases a certain amount of option rights on Miniswap, the system will determine the user's profit or loss based on the market. Option products allow users to buy or sell assets at a predetermined price no later than the agreed time. The predetermined price is the exercise price, and the agreed time is the exercise cycle. And options also have option prices, which are the difference between the exercise price and the current price. The value of a call option mainly depends on the value of the base price minus the exercise price. The value of a put option is calculated by subtracting the base price from the strike price. In addition, when users purchase options, they can also choose to purchase option insurance. In some cases, when a user purchases an option and incurs a loss, the option insurance can give the user a certain amount of compensation.
Finally, Miniswap plans to conduct cross-chain transactions after its products mature, and introduce technologies such as Cosmos and atomic exchange protocols to achieve cross-chain peer-to-peer transactions.
The "Game of Thrones" in the DEX world
Sushiswap's two-week "liquidity leveraging" battle against Uniswap was initially successful. This practice shows that the pattern of DEX is far from reaching the end.
Next, Uniswap may fight back, such as launching better products and launching token incentives. Various other swaps will gradually attract everyone’s attention. In this process, there will be a battle for liquidity mining. Who can have a better mechanism design and better sustainable income in the liquidity mining process? So, in the end, whoever is likely to take the lead in the DEX contention.
On another level, due to the final balance of power between various DEXs, it is impossible to have only one or two DEXs left. Because different swaps have their own profit points, have their own bases, and have their own advantages in certain points.
However, although DEX may be dispersed, in the end, there will be a few companies that gather the largest liquidity and trading volume, which is related to the value capture mode of DEX itself. No matter how many tokens DEX issues, how to distribute tokens, whether it is distributed to institutions or communities, its value is rooted in the transaction scale. The larger the transaction scale, the more fees it captures. When the capture fee increases, it will eventually be transmitted to the value of the token. Whoever takes the lead to form a sustainable positive cycle will take the real lead.
How to form a positive cycle? At the beginning, there must be enough income attractiveness to give liquidity providers and traders a certain token incentive, and the price of the token itself also plays an important role in the cold start process, which will stimulate larger liquidity providers Participate with traders to promote the development of short-term potential.
It is particularly important to note here that in the DEX battle, it is necessary to iterate quickly and adopt long-term and short-term incentives. Not only long-term sustainable development incentives, but also short-term incentives for rapid growth. Once the potential energy of DEX rises, there is a natural driving force. In addition, due to the rapid changes in the market, it is necessary to iterate the mechanism at any time, and work with the community to advance quickly. These are the major inspirations of the current DEX battle to the project parties and the community.
The DEX battle is far from over. I look forward to Miniswap and other swaps to explore the sustainable development of DEX!
