Over the last year, the liquidity and trading volumes on decentralized exchanges (DEXs) have increased rapidly. Much of this expansion can be attributed to the rise of constant function market makers (CFMMs), which enable computationally inexpensive on-chain trading.
The concept of liquidity mining (LM) is that the network has a specific need, which is liquidity provisioning, and users are rewarded with tokens, which are often governance tokens that allow holders to vote on protocol parameters, including value capture mechanisms. Many people refer to this as "yield farming," and while the terms are frequently used interchangeably, yield farming does not require a token (e.g. liquidity providers could earn yield on Uniswap solely via transaction fees). Uniswap's AMM system, which uses smart contracts to automate price matching between traders rather than relying on a counterparty, now rivals centralized exchanges in popularity and volume, and has spawned a slew of spinoff DEXes. Some newer DeFi derivatives projects that have created custom-built AMM systems include for options, perpetuals, and interest rates.
The primary goal is to distribute the majority of the tokens through an objective criteria that is not limited to only direct sales (e.g., being an active user of the protocol), while ensuring that everyone has equal access to that distribution. Imagine creating Uber, but having it owned by its drivers and riders from the start (Yes, it did not happen with Uber, just an example to explain the concept).
Another goal of programmatic decentralization is to gradually increase community ownership while minimizing treasury management. This is like Uber creating a legally binding agreement to distribute the majority of its stock to drivers and riders over the next few years (not that we see that happening. Remember, just an example). Another reason being an LP on AMM works well is that it incentivizes specific user behavior over a set period of time. Consider this the equivalent of Uber rebating a portion of their customers' rides in Uber stock.
Equal and Fair Participation in Liquidity Mining
Most LM incentive programmes today benefit those with a lot of money, which hurts community engagement and token distribution. Based attempted to address this by capping the amount that could be staked in their initial liquidity pool at $12k per address. Pickle attempted to address this by instituting quadratic voting in order to prevent whales from gaining asymmetric influence over governance decisions. While we don't know if whales (users with very large fund pools) used multiple addresses to avoid staking and voting restrictions, it's a step in the right direction.
The accepted definitions of whale movement, the scope of tools, and their outputs vary widely. A whale movement is defined as any transaction large enough to disrupt the underlying economic logic of a cryptocurrency. Whales and whale movements may be mutually exclusive as well; knowing which wallet (if public) the transaction originates from can help to qualify this. Identifying “whales” in market makers are important because their absence or presence greatly influences market depth and price slippage. In addition to primary pool (pool 1), many AMMs have extra incentives in “pool 2” where LPs can earn more tokens by staking their LP tokens.
How do we ensure equal participation in LM programs? One idea is Know Your Farmer (KYF) in the form of a wallet cap, introduced by ARCx, in which wallets must have a 6 month history of interacting with various dApps to be allowed until a certain cap is reached. The idea is that it will help to limit whales during Yield Farming.
A Balancer Smart Pool can choose to restrict who can provide liquidity to it. Initially, a Balancer Smart Pool with the 'Limit LPs' option enabled will allow the pool's controller (whoever created the pool) to 'whitelist' which Ethereum addresses can add liquidity to a pool. However, as with 'Swap Fee,' this can be built to behave according to whatever logic an external contract feeds it. For example, the pool could restrict who can be an LP based on addresses that have a specific POAP token or a Humanode NFT. Alternatively, it may allow LPs to contribute capital based on their pro-rata ownership of a specific ERC20 token.
Humanode-enabled private biometric checks for DEXs
Humanode combines cutting-edge liveness detection, multimodal biometric processing, and continuous proof-of-existence to create robust and fair market participants in DEXs. Imagine using Humanode private biometric checks to attest for participants in Balancer Smart Pool or any other liquidity bootstrapping protocol. This will be a new form of whitelisting where someone's private key and biometric essentially becomes the basis of identity. The Humanode network provides zero-knowledge liveness verification and identity checks to AMMs without revealing the user's identity, demonstrating that the user is the same genuine human being without the use of any personally identifiable information (PII). Humanode enables AMMs to enforce an all inclusiveness from bootstrapping till maturity stage, without jeopardizing sensitive information for LPs.