Why is izumi the bridge between Uniswap V3 and DeFi 2.0 — What I have learned from Messari’s 165-page Report
Written By 0xGoldenZy
This is a contribution from our community member 0xGoldenZy, who also submitted an application to be an izumi ambassador. The izumi team corrected some specific names in the submission and released this article through izumi Medium with the consent of the original author.
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During this past weekend, Messari’s 165-page research report became a hot topic of discussion throughout the crypto community. Everyone was not only impressed by the sheer volume and breadth of coverage, but also by the many insights and in-depth analysis in its content.
For the convenience of other members of the izumi community, I have selected two parts of the report that are most relevant to izumi: Uniswap V3 and DeFi 2.0, summarized them, and combined them with my own understanding of izumi. I’d like to share with you what I think izumi will be the bridge between Uniswap V3 and DeFi 2.0 and will be important for the whole on-chain ecosystem.
In Messari’s report, the segment on Uniswap V3 is titled “Uniswap V3 vs. The World” As we know from the on-chain data, Uniswap V3 has helped Uniswap to account for more than 70% of the on-chain transactions in the Ether ecosystem as a whole, sometimes up to an exaggerated 90%. This result is due to Uniswap V3’s innovative Concentrated Liquidity AMM model, as Messari reported: “Concentrated liquidity is clearly the future of AMMs, and V3 ‘s early success speaks to that.” Therefore, the izumi team was very wise to choose the Uniswap V3 ecosystem as the starting point for the product.
Compared to V2 and other AMM DEX, the liquidity provider of V3 has to set the value range for providing liquidity, but while receiving more transaction fees, it also bears a greater risk of impermanent losses. So for the average user, providing liquidity in UniswapV3 does not guarantee higher expected returns and may also entail certain losses. There is an in-depth analysis of this point in a previous article published by the izumi team, which you can check for yourself. (https://izumi-finance.medium.com/why-shouldnt-you-be-the-liquidity-providers-on-uniswap-v3-for-now-7acd50cc2682)
Since UniswapV3 LP tokens are NFT, this also creates a big obstacle for the traditional liquidity mining model. So the izumi team saw this pain point and innovatively designed LiquidBox to support Uniswap V3 LP NFT mining. This is a major boon for all Uniswap V3 liquidity providers, as they can get additional liquidity mining incentives through izumi in addition to the captured transaction fees, which is equivalent to adding to the Uniswap V3 the entire economic model of the Curve-CRV token. So I personally believe that based on the high capital efficiency of Uniswap V3 and the LP NFT mining supported by the izumi platform, the future of Uniswap V3 could be “Uniswap V3 vs. No One”.
Of the whole DeFi boom, the Messri report writes：”The DeFi boom started 18 months ago with Compound’s yield farming program. Then (and still), a preferred incentive scheme Then (and still), a preferred incentive scheme among DeFi projects has been to offer native token incentives for liquidity providers (“LPs”) to the underlying DeFi protocols.” It is because DeFi projects can use native tokens to incentivize users of their products as well as liquidity providers in a form similar to Bitcoin rewards for miners, so the entire DeFi industry has grown very excitingly in a relatively short period of time. But “These capital providers were critical during DeFi’s bootstrapping period, but have diminished in value over time because they’re fickle: the capital they provide is “hot” and they move from project to project.” Messari also said in the report that he prefers to describe these funders as “locusts” rather than “farmer.
About the segment of DeFi 2.0, the most important concept that Messari emphasized was “protocol controlled value”, and the goal of DeFi 2.0 is straightfoward and simple:”Higher revenues. Lower costs”, so when the aforementioned problems with DeFi 1.0 arose, “Some projects saw this and realized yield farming 1.0 was unsustainable. Instead of creating native treasury token yield farms, they began to create “Liquidity-as-a-Service” schemes that “rented liquidity” from other protocols.” ，and izumi is one of them!
izumi’s LiquidBox offers mining rewards for liquidity funds in a specific range through the innovative “Programable Liquidity as a Service”. The liquidity provider simply stakes the LP NFT of Uniswap V3 to the izumi platform, and the platform’s smart contract reads the NFT data to determine if it is within the incentive price range, and the liquidity provider receives additional iZi tokens and a liquidity mining bonus from the corresponding project. (For specific liquidity mining rules, please refer to this link: https://docs.izumi.finance/product/liquidbox)
With izumi’s LiquidBox, all three participants in a liquidity mining program can gain additional and more efficient benefits from it：
1，DEX — — Uniswap V3
For DEX, the liquidity mining program can attract more liquidity funds to the trading pool, provide lower trading slippage and better trading experience for DEX users, and also attract more Aggregators to place their trading volume on this DEX, thus gaining more users and trading volume. And the liquidity mining incentive brought by izumi can greatly compensate for UniswapV3’s competitive disadvantage with DEXs such as Sushiswap and Curve in terms of additional revenue.
2，Other Listing Projects
With the liquidity mining model provided by LiquidBox, project teams or DAO governance mechanisms can select a specific price range to attract more concentrated liquidity, which is especially important for stablecoins and Pegged Assets. Curve is actually doing something similar, but due to curve’s high market cap, it is costly for a project team to hope to use CRV subsidies to ensure coin price stability. izumi allows projects to spend less on liquidity incentives, get more efficient UniswapV3-based liquidity, and provide trading convenience to their own token holders.
3，Liquidity Providers & Token Holders
For UniswapV3 liquidity providers, as well as potential liquidity providers holding the corresponding tokens, the mining incentive they receive from izumi LiquidBox can significantly reverse their high probability of losses due to impermanent losses by providing liquidity for the corresponding trading pairs. It also provides an additional expected return for holding tokens in their hands, which has a positive impact on the valuation of the tokens themselves. (For more detailed analysis please refer to this link: https://izumi-finance.medium.com/uniswap-v3-user-revenue-analysis-and-how-to-improve-it-with-lp-nft-mining-558eeddd378b）
Based on the above discussion, I personally believe that izumi, which is based on the underlying Uniswap V3 to build Programmable Liquid as a Service, is a perfect tool for DeFi 2.0, It will make Uniswap V3, the DEX that has the most capital efficiency and the largest number of users and transactions, a direct venue for “Protocol controlled Liquidity”. Different types of projects can get “rented Liquidity” at lower cost and higher efficiency by cooperating with izumi for liquidity mining programs.
That’s why the title says izumi is the bridge between Uniswap V3 and DeFi 2.0, so I’m very confident in the future of the izumi project, which also fits with the content of the Messari Report, so I’m writing this article to share with the rest of the community. I hope that izumi will grow even better with the participation and support of the community.