Author: Wintermute
Compiled by: Azuma, Odaily Planet Daily
In the world of cryptocurrency, the issuance of tokens is crucial. A successful token issuance can significantly enhance the value and influence of the protocol and bring huge wealth to various actors within the ecosystem in the form of airdrops.
However, in the current environment, the true potential of token issuance is often limited by the design of decentralized exchanges (DEX) - the protocol that issues tokens cannot capture the value derived from trading activity. By having their own automated market maker (AMM) curve, protocols can more effectively capture and retain the value they create, thereby improving their own economic models while enhancing the sustainability of DeFi.
Token issuance is the most critical moment in the development of the protocol. If designed properly, it will create huge value for all users, contributors, investors and even the entire community. value.
The creation of value will generally take the form of airdrops, where the protocol distributes tokens to users who frequently use its products. So far in 2024, the five largest airdrops alone have created approximately $6.6 billion in value (not counting ZKsync and LayerZero’s airdrops this week).
The ensuing price discovery process will constantly verify and reshape the airdrop recipients’ expectations for the true valuation of the protocol, and determine to a large extent whether they will sell their airdrop shares - in turn this It also applies to potential buyers, i.e. deciding whether they will buy in the first place.
This kind of gambling behavior will bring huge trading volume on the first day of TGE, and both CEX and DEX exchanges can benefit from this process.
As shown in the figure below, the trading volume of Wormhole and Starknet on the first day of TGE exceeded 1 billion US dollars. During a period of time after the currency is issued, the trading volume is generally maintained at a high level, such as Ethena and Wormhole's top 14 The daily trading volume accounts for more than half of the trading volume in the first 50 days.
One thing that is undoubted is that the success of the current token issuance will largely depend on the situation of the online CEX. A larger CEX can provide better liquidity and user base. This helps protocol tokens gain greater exposure and enable more effective price discovery, and both parties can achieve mutual benefit in the process.
However, in the DEX environment, protocols building liquidity pools on top of DEX often require a large upfront cost (should be used for liquidity matching), and the value they create cannot be captured through DEX.
Currently, DEXs have largely failed to properly price and reward the protocols that bring them trading volume, fees, and users.
For example, 100% of Uniswap’s transaction fees will flow to liquidity providers, while protocols such as Pancakeswap, Curve Finance, and Balancer will allocate part of the transaction fees to different groups in their ecosystems - token holders , DAO treasury, etc. However, the protocols that created the tokens and built the liquidity pools were left with nothing.
If you look closely at the composition of Uniswap’s trading volume, various small governance/protocol tokens (as opposed to mainstream coins and Altcoin stablecoins) have historically been one of its main sources of trading volume, accounting for 10% of its trading volume in recent months. Accounting for 30% to 40% of Uniswap’s total trading volume. However, this number may still be an underestimate, as mainstream coins and stablecoins will include some LST, LRT, and decentralized stablecoins, and the value of these tokens is derived from the protocol that issued them.
Although it is not as good as mainstream currencies and stablecoins in terms of transaction volume, Altcoin is higher than the former in terms of fee contribution. Since April 2023, Altcoin has accounted for 70%-80% of Uniswap’s total monthly transaction fees, including as high as 87.7% in October. The difference in market share between Altcoin’s transaction volume and fees is primarily attributable to the 0.05% or 0.01% fee tiers commonly used by mainstream coins and stablecoins, while the 0.3% or 1% fee tiers commonly used by Altcoin pools.
As shown in the chart above, Altcoin’s dominance in transaction fees has been further strengthened since January 2023. On the one hand, this may be because the number of Altcoins continues to increase. On the other hand, it may also be because the major Altcoin protocol teams have spent countless hours and resources maintaining the community, building products, and promoting the growth of token demand. However, in this period In the process, all fees generated by token transactions are captured by the LP of the DEX and do not flow to the protocol itself.
It’s worth noting that some teams have tried to recover some value by implementing buy/sell taxes on their tokens, requiring a fee to be paid for every purchase or sale. This tax collection model has been quite effective for some protocols like Unibot and has generated $36 million in revenue for their ecosystem and token holders. A common drawback of this approach, however, is that it introduces greater complexity into the token contracts themselves and limits teams to capturing fees only on the tokens they deploy and control.
If leading DEXs like Uniswap will hijack the value that should belong to the protocol, what should the protocol do?
One option is to start a DEX yourself, like Friendtech started BunnySwap. BunnySwap is Friendtech's fork from Uniswap V2, and its main purpose is to facilitate transactions of its native token FRIEND.
During the fork of BunnySwap, Friendtech made two important changes: First, the transaction fee ratio flowing to the FRIEND-WETH liquidity provider was changed to 1.5%; second, the protocol fee income attributed to the FriendTech team was also changed. becomes 1.5%.
On the original version of Uniswap V2, you can neither achieve the first point - because the fixed rate of all liquidity pools is 0.3%; nor can you achieve the second point - the latter is also fixed at 0.05%, All protocol fees belong to the Uniswap DAO treasury.
With these changes in place, BunnySwap helped the FriendTech team secure $8.26 million worth of WETH from protocol fees in just 35 days since the FRIEND token was launched. Like most other airdrops, FRIEND has maintained high trading volume in the early days of TGE, reaching $89 million on launch day, which represents $1.7 million in protocol fees.
FriendTech is not the only protocol to recover value by building its own DEX. Since 2021, Katana has imposed a 0.05% protocol fee on all transaction operations on the Ronin chain, which goes to the Ronin treasury.
Since launching in November 2021, Katana has facilitated over $10 billion in transaction volume and brought $5 million in protocol fees to the Ronin treasury. For just two tokens, AXS and SLP, Katana now accounts for approximately 97% of all DEX trading volume, underscoring how effective a closed ecosystem can be at value retention. And before Katana launched, AXS and SLP liquidity pools had generated 38 on other major DEXs. billion in transaction volume, this is expected to equal approximately $1.9 million in lost protocol fees.
Buildingyour own AMM DEX may seem profitable, but it does bring some new considerations and challenges.
In the above case, what FriendTech and Ronin Chain/Katana have in common is that both have built a strong ecosystem with strict restrictions and achieved subsequent capture through advance constraints - FriendTech's transferability to FRIEND restrictions and providing the only interface for users to buy/sell their tokens, Ronin Chain/Katana strongly incentivizes users to migrate AXS and SLP to its dedicated chain. Therefore, for a protocol to successfully capture value, it must strictly control the value it creates within its own ecosystem, because DeFi is permissionless and anyone can use your token without restrictions. Coins deploy their own liquidity pools on another DEX.
In addition, building your own AMM DEX also requires additional audit costs, time and technical resources, and requires convincing users and liquidity providers to accept the corresponding risks.
Finally, building your own AMM DEX also means that you will lose certain network effects. For example, adding your token to only one X-WETH liquidity pool means that all potential buyers will have to buy WETH before buying the token, especially before other aggregators integrate your DEX, which is inevitable Will affect the exposure of the token.
Fortunately, the DEX field is quietly changing, Balancer has announced their V3 version, and Uniswap V4 is coming, which is expected to make the liquidity pool highly customizable. Specifically, Uniswap V4’s hooks architecture will allow liquidity pool creators to add additional transaction fees and treat them as another form of protocol fees. This will allow the protocol to capture some of the value created by Uniswap while enjoying its security and liquidity network effects.
All in all, The current DEX environment fails to properly incentivize the value that protocols bring to their platforms.
By building its own DEX, protocols can avoid the value hijacking that occurs when relying on third-party DEXs. The cases of BunnySwap and Katana prove that protocols can achieve value retention by building their own AMM solutions.
Although this will also bring some new challenges, such as the need for additional audit resources, or new risks, etc., the potential benefits in value retention and ecosystem control make this still an extremely attractive option. Attractive proposal.
As the DeFi industry continues to evolve, protocols may increasingly consider controlling their own AMM curves to ensure longer-term sustainability.
The above is the detailed content of Wintermute talks about the design deficiencies of DEX: imbalanced value distribution. For more information, please follow other related articles on the PHP Chinese website!
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