Why Web3 Projects Should Move to Protocol-Owned Liquidity

Why Web3 Projects Should Move to Protocol-Owned Liquidity
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This could mean the end of liquidity mining as we know it

At DappRadar we believe that it makes a lot of sense for protocols to have ownership over their tokens on the free market, and we call this protocol-owned liquidity. Having control over the liquidity comes with various benefits not found in rented liquidity. 

Launching a project in Web3 comes with a range of challenges. This includes user acquisition, onboarding, design, and actual functionality. However, in Web3 there’s an additional layer of complexity: tokenomics and liquidity.

Many projects launching on the blockchain have their own cryptocurrency as a token on for example Ethereum, Polygon or BNB Chain. However, the financial liquidity to trade these tokens often comes predominantly from either investors or the community. We’ve seen hundreds of protocols initiate liquidity mining programs in an effort to create a sizable liquidity pool. 

However, this tends to be rented liquidity. The rewards coming from these initiatives are often dumped onto the market, plummeting the value of the token. Furthermore, once the liquidity mining program ends a liquidity pool can dry up pretty fast. Investors will look around for their next farming efforts. It’s not without reason that yield farming has become a major headache for new protocols.

With protocol-owned liquidity, we’ve got an alternative that strengthens the protocol… in our case of course, DappRadar. 

The benefit of protocol-owned liquidity

Pioneered by Olympus DAO, protocol-owned liquidity programs utilize a bonding mechanism. This means that the protocol sells its tokens at a discount in exchange for users providing another token. Therefore, the DAO or organization owns the liquidity, meaning that there’s more alignment between the liquidity providers and the intentions of the project. 

Right now there’s DappRadar, the company running the business, and there’s DappRadar DAO. The decentralized autonomous organization or DAO coming from DappRadar will eventually – in the years to come – absorb the entire business. We’re already starting to involve the DAO, and with that also you as the community, into the future of DappRadar. 

DappRadar launched their own protocol-owned liquidity program in July through ApeSwap on BNB Chain. Users need to provide liquidity in the BNB-RADAR pool, and they will receive Liquidity Pool (LP) tokens for that. Then they can use those LP tokens to purchase a RADAR Jungle Bill on ApeSwap. Simply put, this allows users to get a bonus. 

DappRadar doesn’t need to endlessly trade their tokens to incentivize liquidity, but it also puts RADAR – with a discount – back in the hands of the community. Potentially the DappRadar DAO can even generate an income stream from the trading fees, benefiting the community as a whole.  

So in short, these are the benefits of having protocol-owned liquidity:

  • DappRadar DAO becomes a big stake holder in the liquidity, aligning it with the future of the project and helping to stabilize the price of RADAR. 
  • DappRadar DAO also doesn’t need to throw incentivization rewards at liquidity providers, who can – and probably will – jump out once the rewards aren’t interesting enough. 
  • The RADAR community receives rewards paid in the native tokens for their participation. 

Closing words

Yield farming is over, and it’s time to become more serious about tokenomics and liquidity providing. Protocol-owned liquidity is a natural evolution, one that will strengthen protocols and DAOs. At DappRadar we already dipped our toes in, and we’re convinced that protocol-owned liquidity is here to stay as a mechanic to strengthen liquidity and reward the community. 

Join the discussion on the DappRadar Forum. Help pushing forward the world’s dapp store and participate building the road ahead.

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