Liquidity as a Service

Dear Cardears,

In this article, we try to delve into our mission and the problems we are facing. It’s our great pleasure to introduce these to our supporters. As stated on CarDAO’s website, our mission is to further enrich the Cardano ecosystem. How can we achieve the goal in a decentralized way and share the results with our supporters?

DeFi and Liquidity Mining

Before explaining CARDAO, it is necessary to explain the DeFi market first. Decentralized finance (DeFi) has been attracting attention since 2020. There have been a range of DeFi protocols launched across different financial verticals which exist in traditional finance such as exchange, lending, derivatives and insurance. Among all the prominent DeFi applications, decentralized exchange (DEX) with automated market maker (AMM) is the most fundamental element, with an aggregate value locked exceeding $40 billion at the time of writing [1].

Lack of liquidity in DEXs has been a problem for a long time. Neither liquidity providers nor traders used DEX because DEX was slower, more expensive and inconvenient than the centralized exchange (CEX). DEX such as Uniswap and Sushiswap solved this problem by combining liquidity mining with automated market making (AMM). How does it work? The answer is to give incentives.

Figure 1. A brief description of DEX

CEXs have been implementing a policy of reducing fees to liquidity providers (LPs) to provide liquidity [2]. Since LPs were usually people/institutions who traded at high frequency, the policy of reducing fees was a great benefit to them. Instead of reducing fees, DEX solved this problem by giving incentive tokens to LPs (or automated-market-maker) as shown in Fig. 1. The AMM implements a peer-to-peer (P2P) method, where LPs contribute assets to liquidity pools while individual users exchange assets, called swap, with a pool containing the input and the output assets. Then, The era of liquidity mining has begun. People, called yield farmers, started rushing to DeFi projects to get high annual interest per rates (APY). Everyone seemed to be happy since 1) LPs obtained incentive tokens, 2) users were able to exchange their desired crypto and 3) DEXs could accelerate a soft landing of their services.

Problem of Liquidity Mining

Yield farmers who engage in interest APY are more likely to be interested in short-term returns than to support long-term projects. Their main job is to make short-term profits by moving to various projects along with higher APY. This act itself cannot be debated as right or wrong. However, from the perspective of the project, unstable liquidity supply makes the stability of the project unstable. Moreover, the bigger problem is that when the yield farmers sell all the tokens. When the liquidity they provide is gone and tokens are sold, the token price has no choice but to draw a sharp downward curve as shown in Fig. 2.

Figure 2. Liquidity Mining Reflexivity (source: messari)

The problem of liquidity mining seems to be more troublesome in the Cardano ecosystem, since Cardano’s DeFis are in infancy. We try to solve these problems through collaboration with promising DeFi projects as inferred from our mission to enrich the Cardano DeFi ecosystem. Furthermore, we share the rewards fairly with $CADA token holders.

CARDAO: LasS via Protocol Owned Liquidity

Figure 3. LaaS of CARDAO

The launch of CARDAO providing liquidity as a service (LaaS) via protocol owned liquidity (POL) can help to better align the interests of participants and DeFi on Cardano as shown in Fig. 3. This can be achieved by incentivizing participants to buy LP tokens ($CADA) which are offered at a discount to the market rate called “Bonding”. If the protocol is directly responsible for providing liquidity, continuous and stable liquidity supply is possible even when the price of the incentive token goes down, and the burden of liquidity providers caused by impermanent loss can be taken care of instead. The liquidity of CARDAO will be provided first to the Cardano’s DeFi ecosystem as shown in Fig. 4. Furthermore, we intend to use the bridge system to provide liquidity to promising ecosystems in other chains. Revenue will go directly to Cardao’s treasury by smart contract, rewarding participants with $CADA token and some will be reinvested for LaaS.

Figure 4. DeFi ecosystem on Cardano (source: cardanocube)

LaaS is a fast growing DeFi money lego since there exists high demand for liquidity, even more important in the Cardano ecosystem. As DeFi continues to grow, CARDAO’s LaaS will continue to grow and will create the DeFi legos necessary to support future DeFi sectors.

Thank you for putting your time aside to read this article. Those who are interested in CARDAO’s journey, join our community!

Until then,

(🚗, 🚗)

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Reference

[1] Defillama (https://defillama.com/protocols/dexes)

[2] Coinbase (https://blog.coinbase.com/coinbase-december-2020-market-maker-program-ed60c128850a)

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