What would the DeFi world be like without the liquidity war?

Since the birth of DeFi, brutal liquidity wars have been going on throughout.

We have seen that many DeFi projects pay a large amount of costs or release a large number of tokens in order to obtain liquidity. Some projects have succeeded because of this and gained market dominance, such as Uniswap. Some projects will choose to avoid its edge and establish liquidity advantages on specific types of assets to gain survival opportunities, such as Curve for stable coins and Balancer for LSD. , Of course, there are also projects that have exhausted all resources and become unsustainable, returning to dust.

Causes of Liquidity War

DeFi liquidity can easily lead to a natural monopoly field, that is to say, liquidity will naturally concentrate towards the top protocols.

There is such a logical chain: DeFi products with more liquidity will have higher availability, so users will concentrate on this product, and the concentration of users will It will bring more fee income to liquidity providers, making it easier for them to stay. On the contrary, if your product has very little liquidity, the usability of the product will be relatively poor, users will decrease, and the income of liquidity providers will be unsustainable, and they will eventually flee.

This is obviously a Matthew effect logic.

Because of this, competition for liquidity is very cruel. If you cannot obtain a large amount of liquidity in a short period of time, at least obtain a liquidity advantage on assets in a certain segment, then your DeFi project will have difficulty surviving.

If new DeFi projects want to compete for liquidity, they will have to pay a very heavy price. The cost they pay to obtain liquidity is far greater than their investment in product development and technological innovation. This short-sighted tendency will actually be very detrimental to innovation and development in the DeFi field.

We can reflect on this, is this really necessary?

From liquidity war to liquidity sharing

We advocate a new path, that is, liquidity sharing across protocols. Decentralized finance should be open, which is why in addition to the name DeFi, it was also called Open Finance The reason. We believe that cross-protocol liquidity sharing is a matter of course, and an ecosystem should build a unified protocol standard that supports cross-protocol liquidity calls from the beginning.

First of all, when liquidity can be shared, then DeFi There is no need for projects to compete for liquidity in order to improve product availability. Even for products with less liquidity, users can enjoy global liquidity, and their user experience will not be affected, but the actual competition for liquidity will not be affected. has not disappeared, because projects with more liquidity can still capture more handling fees. Therefore, we can think that liquidity sharing actually transforms cruel liquidity wars into healthy liquidity competition. < /p>

Secondly, when liquidity can be shared, newly created DeFi projects can survive with only a small amount of liquidity without spending huge costs to obtain a large amount of liquidity in a short period of time. Then the project can use the power of funds and teams for truly valuable innovations. , such as improving capital efficiency, improving matching mechanisms, etc.

Third, when liquidity is shared, it means that liquidity and product front-end are actually decoupled. , this will bring diversified choices in business models to the project. Let’s take DEX as an example. When users use DEX. When trading on the platform, the revenue paid to the platform actually includes two parts, namely the front-end usage fee and the liquidity usage fee. The front-end usage fee belongs entirely to the platform, while most of the liquidity usage fee goes to the LP. , a small part will belong to the platform, that is, DEX. We can understand the income of the platform as having two parts, namely the front-end usage fee and the liquidity usage fee. If it cannot be decoupled, users can only use the liquidity of which project they use. Under the premise of sexual sharing, users will enjoy global liquidity no matter which front end they use. This gives users the freedom to choose the front end, and also gives the project team two choices in business models:

Developers with a platform that has traffic, or the ability to develop a smooth front-end experience, can focus on developing the front-end, with front-end royalties as the main income. This looks a bit like the business model of an aggregator, but in the absence of When establishing a unified liquidity sharing standard, the aggregator needs to develop a very complex routing protocol. Its core competitiveness is still not the front end, but the intelligence of the routing protocol.

Platforms with LP resources and the ability to aggregate more funds can choose to mainly earn commissions on liquidity usage fees. There is no need to invest too many resources in front-end experience optimization. Platforms with financial strength and LPs with development capabilities can even choose to build their own liquidity platform, without being commissioned by anyone, and without having to entrust their funds to any agreement.

Strategic. management ability LPs can even customize market-making strategies based on their own liquidity platforms and are not restricted by a unified platform.

< p style="text-align: left;">FusionFi Protocol

End the liquidity war and achieve liquidity integration. This is what the AO ecosystem is promoting FusionFi Protocol (FFP) to do. Through FFP, AO tries to build a healthier DeFi ecosystem.

So how does FFP achieve liquidity integration?

All finance The core of the business is actually the circulation and processing of bills. FFP defines a unified bill data structure. This data structure can express spot orders, options, futures and other contract orders, and can also express loan orders, so FFP can Supports various financial transaction scenarios

Taking DEX as an example, anyone can create spot order tickets, including AMM (when a user initiates a transaction request, AMM can also create a temporary limit order). These tickets will enter a ticket pool, and anyone can It can be seen that the matching bills are extracted from the bill pool and submitted to the Settlement Process for settlement. After the settlement is completed, the status of the bills changes and both parties to the transaction obtain their own rights.

Settlement behavior is atomic. If settlement fails, the status of the bill will not change, and the transaction parties will not produce any actual exchange of equity.

This settlement model is very efficient. It can settle a single bill or multiple bills together. The trader can submit the settlement himself or anyone can submit the settlement. This brings some superpowers to DEX, such as multiple transactions. Jump trading and no-principal arbitrage.

Multi-hop trading means that when a user wants to exchange asset A for asset C, but there is no direct liquidity, he can first exchange asset A for asset B, and then exchange it for Asset C is used to complete the transaction.

Principal-free arbitrage means that arbitrageurs find orders with spreads in the bill pool and submit them to the settlement center for settlement, thereby obtaining the spreads process.

Multi-hop trading and no-principal arbitrage are essentially joint settlements of multiple bills.

Image source:

https://x.com/Permaswap/status/1854212032511512992

Via FFP SDK , developers can implement most DeFi protocols with low code. Just as the Cosmos SDK greatly reduces the time it takes developers to create blockchains, the FFP SDK greatly reduces the time it takes AO developers to create DeFi protocols.

Summary

The natural monopoly effect of liquidity leads to liquidity among DeFi protocols The war was extremely fierce, which not only led to the dispersion of liquidity and damaged user experience, but also caused new protocols to invest excessive resources in competing for liquidity and were unable to focus on truly meaningful innovation.

In order to solve this situation and accelerate the development of ecological DeFi, AO introduced FFP, a unified protocol for sharing liquidity across projects, at the beginning of ecological development , which not only improves the overall liquidity efficiency of the entire ecosystem, but also liberates the creativity of developers. Driven by FFP and FFP SDK, DeFi on the AO ecosystem is expected to accelerate and form a healthier financial ecosystem.