Nova Research Institute | With DeFi's stagnant growth, what kind of incentives does Swap need?

In May 2020, the DeFi lock-up market value was less than 1 billion U.S. dollars. After four months of fierce development, the DeFi lock-up market value had exceeded 10 billion U.S. dollars by September. With the ten-fold increase in the market value of locked positions, the momentum of the DeFi concept currency rose and the continuous emergence of rich stories have pushed the market to the highest point. What followed was the exhaustion of purchasing power and funds, as well as the aesthetic fatigue of various copycat models. DeFi's locked-up market value has also stalled in growth in the past month.




Many DeFi projects rely on liquidity mining to achieve rapid startup, but as the DeFi market's popularity has cooled, they have begun to fall into a death spiral of falling currency prices, declining revenue, declining transaction volume, and loss of users.

The DeFi industry is beginning to face issues that need to be considered after the fever has subsided. Under the current situation of stagnant DeFi growth, what kind of incentives does swap need? When liquidity incentives decline sharply, how to ensure the liquidity of the fund pool? This article will compare the incentive models of the first-generation swap-Uniswap, the second-generation swap-Sushiswap, and the emerging swap-Spaceswap, and explore how the agreement can achieve a balance between availability and contributors’ profits.


The first generation of Swap -Uniswap



Uniswap is currently the DEX with the largest market share on the Ethereum network. It conducts decentralized transactions based on exchange pools and AMM instead of traditional order book transaction protocols. During the transaction exchange process, Uniswap's liquidity provider can get 0.3% of the transaction fee in the fund pool as a reward, and at the same time, it will be distributed proportionally based on the share of the deposited funds.




In less than two years, Uniswap achieved: More than 250,000 addresses traded approximately 8484 different assets on Uniswap, with a transaction volume of 20 billion.

49,000 liquidity providers (LP) locked up more than 1 billion liquidity and earned about 56 million transaction fees. Uniswap provides users with instant and smooth liquidity access and becomes the basic DeFi infrastructure, integrating nearly hundreds of interfaces and applications.

But the early version of Uniswap's incentive method has two shortcomings:

1. The risks and benefits of early liquidity providers are disproportionate: Uniswap can operate, relying solely on liquidity providers to provide it with a lot of liquidity. Early liquidity providers took more risks, but did not get more benefits.

2. Impermanence loss: Impermanence loss refers to the loss caused by changes in the exchange price of the two tokens in the trading pair when the liquidity provider withdraws from the deposit price. Any significant rise or fall of one of these two tokens may lead to impermanence losses. The greater the volatility, the greater the impermanence loss.

At the same time, some Uniswap-based fork projects and imitation projects have appeared on the market, aiming to solve some problems of Uniswap.

Uniswap finally launched its own governance token, UNI, one month ago. It minted 1 billion at its founding, and 60% will be allocated to community members and historical users, of which 4.92% of the total will be distributed proportionally to 49,192 historical Liquidity providers, and 10.06% are evenly divided among 251,534 historical user addresses. Any address that has called Uniswap V1 and V2 can claim 400 UNIs, and even 12,000 addresses that have only submitted failed transactions can claim.




The purpose of UNI is to realize shared community ownership by implementing an on-chain governance system. This governance system will promote the development and use of the agreement, as well as the development of the broader Uniswap ecosystem. Uniswap also completed the counterattack against other competitors with this move, creating a historic moment for Defi.


The second generation Swap-Sushiswap



On August 28, SushiSwap announced that it would launch its own decentralized exchange. Many in the DeFi community referred to Sushiswap as a "vampire mining attack." Nearly US$1 billion of liquidity was transferred to Sushiswap, and the price of SUSHI was once as high as US$10, and its market share briefly surpassed Uniswap.




(Sushiswap total lock-up volume change curve)


Sushiswap adds a token economy incentive mechanism based on Uniswap's incentive mechanism, that is, a part of the exchange transaction fee is distributed to SUSHI holders.

Sushiswap's transaction fee is also 0.3%. But it divides the 0.3% fee into two parts, of which 0.25% is provided to LP, and the remaining 0.05% is used to repurchase SUSHI. The value captured by SUSHI is positively correlated with the transaction volume on Sushiswap.

Sushiswap's economic incentive mechanism has been improved on the basis of the early Uniswap, ensuring the long-term benefits of early participants. Stimulated by the token incentive mechanism, SushiSwap attracted a large number of Uniswap users into its platform. Data at the time showed that among the 13 trading pairs, an average of 88% of the liquidity providers came from Uniswap.




(Sushiswap early mining reward data)


Sushiswap aimed at Uniswap's liquidity provider. Although it did not build a brand-new model, it succeeded in capturing most of the market in a short period of time, relying on the incentives of native tokens and the time difference between Uniswap's unissued currency. Although the subsequent founder sell-off incident caused a heavy blow to Sushi, Sushiswap still made a strong mark in the Defi market.


Innovative Swap-SpaceSwap




SpaceSwap is a DeFi protocol that connects users to a large liquidity pool and provides governance tokens as an incentive. The platform will pay part of the transaction fees to the liquidity provider, and on this basis will pay the corresponding amount of tokens. SpaceSwap represents a new generation of liquidity mining services by implementing easy token conversion and distribution through third-party liquidity pools.

SpaceSwap provides the following functions:

Simplify the way Uniswap and other protocols convert LP tokens

Additional income for local token holders

A stable APY liquidity pool.


SpaceSwap's infrastructure was originally based on the Uniswap DeFi protocol, but it has been improved and perfected. "Miners" who use SpaceSwap can get the following profit selection combination: Uniswap 0.25% reward + MILK + MILKSHAKE holders additional MILK (0.05% of transaction fees).



There are currently two versions of SpaceSwap, v1 and v2:

In the SpaceSwap V1 protocol, it provides the same pool as Uniswap, and has a similar token economic model and a mainnet based on Ethereum. But contrary to Uniswap, SpaceSwap has two local tokens: MILK and SHAKE. Its working principle is: Uniswap liquidity providers keep their assets in the fund pool and get a 0.25% profit share from transaction fees.

The LP tokens obtained due to this liquidity will be moved to the same fund pool of SpaceSwap, which will generate additional MILK tokens as a reward for LP betting.

SpaceSwap liquidity providers can use their MILK to buy SHAKE stablecoins. The ratio of SHAKE to MILK is 1:1000, which provides holders with additional profits after the bonus is distributed. 0.05% of Uniswap's 0.3% LP reward will be used to purchase MILK from the market and share tokens with SHAKE holders.

In the V1 protocol, the token issuance mechanism makes it difficult to maintain the price of MILK tokens. Excessive circulation makes it impossible to effectively reduce inflation and reduces the value of tokens.

In order to eliminate the shortcomings and defects of the initial v1 protocol, SpaceSwap launched an upgraded and improved version 2.0. Enjoy the new funding pool, more reliable MILK2 tokens and smarter liquidity distribution.

SpaceSwapV2: SpaceSwap realized that issuing tokens too quickly would have a negative impact on the price of MILK, so it introduced MILK2 tokens with different issuance mechanisms. The reward will be gradually reduced to reduce inflation:

When the first 10,000 blocks are generated, 40 MILK2 tokens will be minted in each block. For the next 30,000 blocks, 20 MILK2 tokens will be minted.

For the next 60,000 blocks, users will share 10 MILK2 tokens in each block. After that, each block will mint 2 MILK2 tokens. The original MILK tokens will be retained but cannot be exchanged for SHAKE or MILK2 tokens.

This method will reduce the devaluation and price drop of MILK2 tokens. A similar deflation model will be applied to the SHAKE super token, which will be launched on the official launch day.

SHAKE owners will share 1% of MILK2 tokens-this reward will be distributed for every 100,000 blocks generated from the time the project was launched. From the moment they buy SHAKE, SHAKE holders will have to generate 100,000 new blocks before they begin to receive 1% of the MILK2 token share.




Initially, SHAKE will be linked to MILK2 tokens at a ratio of 1:1000 (1 SHAKE = 1000 MILK2). Once in the market, its price will begin to fluctuate, just like regular cryptocurrencies. In order to maintain the value of SHAKE, SpaceSwap will increase the price of each SHAKE token (10 MILK2 per token). Only 10,000 SHAKE tokens will be issued.

The new smart contract will enable MILK2/SHAKE two-way swap. During the MILK2-SHAKE exchange, tokens will be distributed. However, during the reverse exchange period, that is, SHAKE-MILK2, the price was reduced by 10MILK2 to prevent arbitrage. In addition, the SpaceSwap team will receive 3% of MILK2 tokens.

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