Model 2: “One-sided non-impermanent loss Mining” model for non-stable tokens in the full price range
This is the second installment of izumi’s series of articles introducing the LiquidBox mining model. In the previous article, we introduced the “Concentrated liquidity mining model” with a fixed reward price range for stablecoin and pegged-asset.
In this article, we will introduce Model #2 of izumi’s “Programmable Liquidity as Service” for non-stablecoin Crypto Tokens, and analyze its large potential market.
Why Does Uniswap V3 need this model?
In izumi’s previous post on an in-depth analysis of the Impermanent Loss of Uniswap V3 liquidity providers (link), we discussed that based on the on-chain data, Uniswap V3 liquidity providers are in an overall loss-making position due to Impermanent Loss. In other words, for these liquidity providers, if they did not choose to provide liquidity on Uniswap V3, but simply hodl the crypto assets in their hands, they would probably end up with a higher return on their investment.
A large part of this investment result is due to the fact that the price trend of cryptocurrencies tends to be one-sided over time, so the transaction fees captured by liquidity providers on DEX do not compensate them for the investment losses they suffer due to Impermanent Loss. This has become a major problem for many decentralized exchanges as well as liquidity providers.
Another problem with liquidity in traditional DEX is that it creates potential buy and sell orders. In the traditional xy=k model, the LP puts about half the value of USDC and half the value of the project tokens into the DEX liquidity pool to get LP tokens and participate in the Liquidity Mining.
However, in this traditional model, LP puts all USDCs as potential buy orders and project tokens as potential sell orders into the liquidity pool of the trading pair, causing LPs to passively sell their project tokens and suffer from impermanent loss when the price goes up. Additionally, it also creates passive selling pressure on the project side, preventing price increase and creating a “lose-lose” situation.
How does izumi solve this problem?
In order to solve this dilemma and reduce the risk of Impermanent loss, izumi innovated the “one-sided non-impermanent loss” model based on Uniswap V3, which puts the LP’s USDC into the (Pa, Pc), just below the current price Pc, and puts the LP’s project tokens into the staking mining instead of into the trading pool (i.e. above Pc as potential sellers), thus creating a model of “stronger buying than selling”, which is more conducive to a price increase.
For example, if the current price of XYZ is 3 USDC, LP will deposit 1k XYZ and 3k USDC into the izumi platform in one click to mine and receive a 90% APR on the total principal (similar to the Sushiswap xy=k model). izumi manages this by placing 3000 USDC in the Uniswap V3 (0,3) price range to provide potential buying orders when the price declines. The 1k XYZ is placed in the staking module to lock in liquidity, but not in Uniswap V3, so it won’t be sold passively when the price rises, resulting in no impermanent loss or passive selling pressure on the project side.
Comparison with traditional Staking
The design logic of Model#2 essentially takes the advantages of traditional liquidity mining and staking models and combines them organically to form a new” Half Liquidity Mining + Half Staking” model.
In the traditional Staking model, many users of the project simply Stake the project tokens into Pool to receive a mining reward. However, this part of Staking users do not substantially contribute to the development of the project on an ongoing basis but are rewarded with an inflationary token economic model based on their holdings, so it is a very capital inefficient way to reward community members.
However, in Izumi’s liquidity mining process, the user participates in Staking with the project token and receives the rewards but must match the same value of stables as liquidity support into the liquidity pool of the corresponding transaction pair in Uniswap V3.
When the price goes up, there is no impermanent loss, and Liquidity Providers will get their rewards from the Staking pool. When the price goes down, the percentage of impermanent loss for LP (Pa=0) is the same as xy=k. However, inthis situation, the liquidity providers will not only get the transaction fees from Uniswap V3, but will also get the Staking rewards. The overall distributed incentives for the project are the same as in the xy=k model.
This provides a much more effecitive Liquidity Mining program which is best for the interest of both the project and token holders: in the upcycle, passive sell liquidity is low, whereas, in the down cycle, a buying support of stablecoins is consistent (if Pa is greater than 0 then the buying power is also enhanced).
About izumi Finance
izumi Finance is the first protocol to support Uniswap V3 “non-homogeneous” liquidity mining and extend concentrated liquidity service for multi-chains. izumi provides “Liquidity as a Service” (LaaS) based on Uniswap V3, with innovatively designed liquidity mining modules of “Concentrated liquidity mining” model for stable assets with a fixed price and “One-sided non-impermanent loss Mining” model for non-stable tokens. These structured models would support any blockchain project to better implement liquidity incentives with much higher capital efficiency and enable liquidity providers to earn extra rewards.