DeFi
PieDAO, a DeFi yield platform, is trying to finish its token emissions to liquidity suppliers after this system drove down the worth of its native token, known as dough.
The motivation program — known as Doughpamine — is amongst a slew of liquidity mining packages created by DeFi protocols to bootstrap liquidity. These tasks lease liquidity from market contributors in alternate for token emissions from the protocol.
Whereas these packages can have advantages for DeFi protocols by attracting liquidity at the beginning of the undertaking, they arrive at a price. As a result of the token emissions used to reward liquidity suppliers (LPs) enhance the variety of the protocol’s cash in circulation, this could drive down their worth.
In PieDAO’s case, the undertaking distributed 18.8 million DOUGH for the reason that begin of its liquidity mining program in April 2021. The undertaking rewarded LPs with these tokens for offering liquidity in 4 incentivized swimming pools on the platform. The association with the LPs is that 20% of the rewards are instantly liquid whereas the opposite 80% are underneath a one-year linear vesting schedule.
An finish to PieDAO liquidity mining
PieDAO says renting liquidity comes at a substantial price to its DAO treasury. The price of liquidity — a measure of how a lot the protocol pays for each $1 value of liquidity supplied — for 3 of PieDAO’s 4 swimming pools ranges from $0.50 to $0.86.
A excessive price of liquidity shouldn’t be useful for DeFi tasks because it signifies that the rewards it has to pay out are virtually at par with the liquidity being rented from LPs. Certainly, PieDAO said that the price has risen to as excessive as $1.52 previously, that means that there have been durations the place the protocol was renting liquidity at a loss.
“The truth that the DAO has been overpaying for liquidity provision has actually been contributing to the dough promote stress, probably inducing a ensuing poor worth efficiency,” the proposal said.
PieDAO’s DOUGH token is down 98% since April 2020. Picture: CoinGecko
PieDAO has seen its native governance token decline by over 98% from $2.14 when it began this system to $0.04 as of the time of publishing. It peaked at $6.27 in October 2020.
The DAO will maintain a SnapShot vote to resolve whether or not to halt liquidity mining for all 4 swimming pools. For the vote to go, 60% of contributors must assist the movement. Nevertheless, some in the neighborhood have requested that one of many swimming pools, with a considerably decrease price of liquidity, ought to stay incentivized.
Mitigating the attainable dangers
The proposal authored by PieDAO core contributors and treasury committee members additionally recognized some attainable dangers related to ending incentivized token emissions for LPs. For one, the proposal’s authors acknowledge that LPs might resolve to withdraw their liquidity if the undertaking stops rewarding them. The proposal additionally recognized the likelihood that LPs might promote their remaining tokens as soon as the vesting interval ends.
To mitigate these dangers, the proposal known as for the DAO to institute a token buyback program. This program goals to scale back the circulating provide of dough tokens. As such, the DAO could also be desiring to burn the tokens.
With the pivot away from renting liquidity from LPs, the DAO might want to give you one other strategy to get hold of liquidity. One viable possibility already being mentioned in the neighborhood is the protocol-owned liquidity mannequin utilized by the likes of OlympusDAO. In protocol-owned liquidity, the DeFi undertaking doesn’t lease liquidity from LPs. As an alternative, the protocol acquires liquidity supplier tokens from market contributors. On this manner, the protocol has autonomy over the underlying liquidity owned by these token positions.
PieDAO is the most recent DeFi protocol to contemplate ending its incentivized token emission scheme. Decentralized alternate aggregator ParaSwap just lately introduced that it was trying to scale back its native token emissions in addition to transfer to a social escrow system.