“I think it’s going to be very soon,” Hayden Adams said in a prerecorded interview broadcast Thursday to wrap up Consensus 2021. “One thing that we’ve seen in the past couple of weeks is basically a grant from the Uniswap grants program, which comes from governance, that was … issued to someone who’s working on liquidity mining smart contracts. And so we’re kind of seeing the community build this out.”
Liquidity mining is a kind of yield farming in which users of a decentralized finance (DeFi) product earn an additional token on top of the regularly expected yield just for putting assets into a liquidity pool – hence the term, “liquidity mining.”
When the money market Compound announced a liquidity mining program for its governance token, COMP, last year, it kicked off the boomlet known as DeFi Summer 2020.
Toward the end of that heady period, Uniswap airdropped, or distributed, its governance token, UNI, to eligible stakeholders and then ran a very brief liquidity mining program across a few key liquidity pools.
Since then there has been no way for users to earn new UNI (except the Uniswap grants program).
However, at the launch of UNI, Uniswap reserved 430 million units for distribution in several different ways, including liquidity mining.
Laying the foundations for this moneymaker’s return, Omar Bohsali, the entrepreneur-in-residence at Paradigm Capital, the fund founded by Coinbase co-founder Fred Ehrsam, has been working on a staking system for the newest version of Uniswap’s software.
Adams announced on Twitter on May 18 that Bohsali’s work had earned the support of the grants program, which is run by six people approved through Uniswap’s governance system.
Third time's the charm
Uniswap released the third version of its software this month, and it quickly became the most popular decentralized exchange on Ethereum.
Previous versions of automated market makers could be knocked out of line with the market by large trades and wasted liquidity. The new version allows sophisticated market makers to lock their deposits in within the band in which traders are likely to want to trade. This improves efficiency for traders.
“There was sort of a lot of speculation, when we first announced v3, because it was much more complex and liquidity isn’t all identical. There were some open-ended questions from people as well. Would it be possible? And the answer is yes. It’s completely possible. And it’s being built,” Adams said at Consensus.
Uniswap gives any asset holder on Ethereum (the second-largest blockchain, based on the market cap of its native token, ETH) a way to participate in making markets, something that has only been possible for people with very deep pockets in traditional finance. Any two Ethereum tokens can be placed in a Uniswap pool, which improves liquidity for that trading pair. A liquidity pool serves as a sort of stockroom for a decentralized exchange, ensuring that when someone offers to buy or sell a token, the asset they want is available.
“Uniswap is basically a protocol for trading digital currencies,” Adams said. “It makes useage of the decentralized nature of Ethereum in a new way.”
In the prior liquidity mining run, users who deposited funds in various Uniswap pools were rewarded with UNI tokens.
Approving the grants program is the only action Uniswap governance has taken since UNI was released. Only two prior measures have reached a final vote, and both failed, including a bid led by Dharma, a DeFi portal for mobile devices, to make retroactive airdrops to more past Uniswap users.
“Definitely, I would say it is a conservative approach,” Adams said of Uniswap governance. “From day one, we were kind of committed to it being as decentralized as possible and have it sort of fully on-chain. And so it was like a little bit of a slower process with a higher threshold for things passing.”
Adams argued that with the grants program funding new projects, activity will speed up.
“It’s kind of it’s slow and it’ll be slow, and then it will be very fast as some of the infrastructure comes into place,” Adams said.
DeFi to come
Ehrsam, a Uniswap investor and co-panelist with Adams at Consensus, predicted many more financial services will enter the space.
“If there’s a periodic table of all of the financial primitives that one needs in a financial system, what are all the elements on the table? Which exist today in DeFi and which do not yet exist? And I think what we’re seeing is just the natural kind of progression of basic financial building blocks from simple to complicated,” Ehrsam said.
He said he expects the number of financial services to proliferate potentially as fast as the kinds of media content proliferated with the invention of the internet.
“Not only will it be kind of one by one, replacing all the TradFi [traditional finance] stuff, but I think that beyond that we might be discovering some new elements as well. Things that kind of simply weren’t possible in traditional financial systems might be made possible in DeFi,” he said. “I think it applies to financial products, and probably also financial assets as well. I’m expecting [a] many, many orders of magnitude increase in just the number of assets that exist.”