What is Protocol-Owned Liquidity (POL)?
Recently, a new paradigm has emerged in the DeFi (Decentralized Finance) ecosystem to address liquidity issues: Protocol-Owned Liquidity (POL). This approach differs from traditional liquidity mining (LM) in that the protocol itself owns the liquidity, aiming to establish a more stable and sustainable ecosystem.
[Problems with Traditional Liquidity Provision Methods]
Existing DeFi protocols have relied on liquidity mining to secure liquidity. Users provide liquidity and receive governance tokens as rewards. However, there are several issues with this approach:
- Vampire Attacks: Users often withdraw liquidity once they receive rewards and move to other protocols offering better incentives.
- High Inflation: Continuous token rewards lead to an increase in the supply of governance tokens, which can result in long-term price declines.
- Lack of Sustainability: Liquidity is maintained only as long as providers receive rewards, so when incentives decrease, liquidity also diminishes.
[Concept and Mechanism of POL]
POL is a method where the protocol directly owns and manages liquidity. The concept of POL was pioneered by projects like OlympusDAO.
- How POL Works
- Direct Liquidity Acquisition by the Protocol: The protocol participates directly in liquidity pools using its own assets.
- Utilization of Bonding Instead of Liquidity Mining: The protocol sells its governance tokens at a discounted price, and users provide liquidity in exchange for these tokens.
- Long-term Liquidity Maintenance: Since the protocol owns liquidity directly, it can be sustained continuously.
[Advantages of POL]
- Increased Sustainability: By holding liquidity directly, the protocol does not rely on external liquidity providers, allowing for stable long-term operations.
- Prevention of Inflation: There is no need for excessive issuance of governance tokens, which helps to maintain token value.
- Community-centered Operations: Utilizing POL allows the protocol to control liquidity directly, fostering trust with the community.
- Cost Reduction in Securing Liquidity: Unlike liquidity mining, there is no need for ongoing rewards, leading to lower operational costs for the protocol.
[Representative Projects Implementing POL]
- OlympusDAO (OHM): The first project to introduce the concept of POL, utilizing bonding to allow the protocol to own liquidity directly.
- Tokemak (TOKE): Designed to efficiently allocate liquidity while maintaining a stable ecosystem without centralizing liquidity.
- Redacted Cartel (BTRFLY): A project that extends OlympusDAO's POL model by leveraging DeFi infrastructure like Curve and Convex.
[Future Prospects of POL]
POL is being recognized as an innovative model that is more sustainable and enhances the autonomy of protocols compared to traditional liquidity mining methods. As more DeFi projects adopt POL, an increasing number of protocols are moving to secure their own liquidity.
In the future, the POL model is likely to be utilized not only in DeFi but also in NFT marketplaces, GameFi, decentralized exchanges (DEX), and various blockchain ecosystems. By managing liquidity independently, protocols can develop more efficient and long-term growth strategies.
[Conclusion]
Protocol-Owned Liquidity (POL) represents a significant innovation aimed at addressing liquidity issues in DeFi. By overcoming the limitations of traditional liquidity mining, it allows protocols to manage liquidity directly, thereby creating a more sustainable ecosystem. It is essential to observe how the POL model evolves and how many more projects will adopt this approach.
This article does not constitute investment advice or financial recommendations. Cryptocurrency investments carry high risks, and the responsibility for any investment decisions lies solely with the investor.
