By the end of 2018, many cryptoseptics had a moment “I have already told you”, when many initial coin offers or ICOs failed to fulfill their promises. In the period 2017 to 2018, 3,250 projects were launched as part of the ICO, and $ 21.4 billion was attracted by investors. But in early 2018, research showed that almost half of 2017 ICOs had failed – and a further 13% were considered “almost unsuccessful” – when it came to delivering financial blows to potential coin buyers. Many projects had very high returns in the beginning, and then they noticed that the currencies weakened rapidly.
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It is important to note that many other ICOs have been successful, and have launched projects that are still flourishing today (Chainlink is a good example). Despite the successes, investors did not want to forget less successful stories – in the last two years, ICOs have slowed down significantly.
Skeptics may have been too happy. Although the ICO may not be the optimal financing mechanism for decentralized projects, the basic promise of these innovations remains. Innovation continues, and a new bootstrap method – liquidity mining – aims to fill this gap.
Related: Explain DeFi Liquidity Complexes
In liquidity extraction, the project offers tokens to anyone who wants to invest their money in a smart contract. Let’s take a hypothetical example: Cranberry Finance offers the Cranberry Coins liquidity provider token to any user who lists Cranberry and Ether (ETH) on Uniswap. In addition to the fees charged for each trade between Cranberry and ETH on Uniswap, anyone who earns tokens for their liquidity provider in a smart contract can earn more coins from the project. Depending on the price of Cranberry Coins, the Cranberry Rewards rate and the volume of liquidity offered, the annual return on liquidity management programs may vary from double-digit returns at the low end to annual returns of over 10,000% for the most risky projects. … …
The proliferation of both liquidity management and decentralized financing, or DeFi, has surprised eternal optimists in the industry (myself included). Today, DeFi has a market value of over $ 80 billion and a total value of over $ 67 billion (compared to $ 5.4 billion raised by the ICO throughout 2017). Although liquidity operations were first implemented on a large scale only in the mid-2020s, it is clear that a new boom has begun.
But for many, the question remains: Will this boom eventually collapse? Will investors looking for high returns be back in their hands?
ICOs and liquidity recovery operations have several things in common: that always fall on the investor: he must know what to invest in and take risk (and the risk is real). But I think the answer to the above questions is that there are fundamental differences between ICOs and liquidity management that make liquidity management a more sustainable financing model to create long-term value for both project developers and their investors. Let’s see how ICOs and mining are different in terms of liquidity.
Comparison of native objects: ICO vs liquidity management
The ICO introduced a token distribution mechanism, provided funding and set up a user base for coins. However, some of the inherent disadvantages of the system became apparent. Investors usually see high returns immediately after the ICO, but after that the cost often drops. Since the symbols did not provide any legal rights or opportunities to generate income beyond the market value of the coin, nor project management, many did not have much incentive to continue to own tokens. Many investors quickly made a profit and spent money, which did not help support the currency rally. Some ICO projects have turned out to be scams, piracy or poorly designed projects with inadequate management teams that have used their invested capital to waste.
Liquidity extraction works according to a completely different principle. Since the trading volume of decentralized exchanges exceeds the volume of centralized exchanges, the token’s competitiveness depends on the availability of sufficient liquidity on the decentralized exchange; However, it can be difficult to obtain liquidity to support the exchange, derivative contracts, lending platform, etc. Distribution of tokens to liquidity providers is the main mechanism for the original liquidity requirement. Tokens have a value above the face value of the coin, and provide returns – and often management rights – that stimulate a sense of ownership in the company and long-term storage.