Increasing TVL is a core goal for many DeFi projects and is also the most critical issue.
There are mainly four methods:
1. Token issuance expectations: Attracting liquidity through point activities.
This method is the most direct, with the highest return on investment. It does not require initial real monetary costs, only the expectation of future rewards for users.
It's like a wolf in sheep's clothing.
There are two core groups in the cryptocurrency circle: traders and yield farmers. These two groups correspond to the secondary market and the primary market, respectively.
Traders refer to secondary market users who make money through trading; yield farmers refer to primary market users who early participate in projects, contribute data to the project, and gain airdrop shares when tokens are issued.
For projects that have not yet issued tokens, a very effective marketing method is to conduct various airdrop activities.
By providing early users with point rewards to attract their participation, giving users the expectation that points can be exchanged for the platform's tokens or other rewards. This method can attract users and build a community without substantial capital expenditure upfront.
2. Collaborating with other projects: Achieving asset interoperability and liquidity through partnerships with different projects.
This method relies more on the project's own background and channels; it is essentially a resource exchange.
For example, users can use tokens from other projects as collateral or payment methods on your platform.
Typical examples include Merlin and Solv. After the issuance of tokens by Bitcoin L2 Merlin, to retain liquidity within its ecosystem, it collaborated with the Bitcoin staking protocol Solv, directing liquidity into Solv, which then became the largest Bitcoin staking protocol.
Of course, Solv currently only supports Merlin as a Bitcoin L2, so liquidity is retained in Merlin, which is the cost Solv incurs, ultimately resulting in a win-win situation.
3. Income incentives: A typical practice is liquidity mining, establishing liquidity pools, and attracting users to add assets to the liquidity pools through transaction fee rewards.
This is a very popular incentive mechanism where users provide liquidity to designated pools and receive rewards. This method can quickly increase TVL.
This method requires a well-designed reward mechanism to avoid inflation caused by overly generous rewards, while also paying attention to risk management.
4. Creating more new assets: liquidity staking and liquidity restaking are creating new assets, thereby attracting incremental funds.
Issuing new assets is not just about releasing the liquidity of already staked assets, but more importantly, it can attract incremental funds. By creating new financial instruments, such as stETH (a certificate for staked ETH), it not only improves the liquidity of already staked assets but also creates new investment opportunities, attracting more capital.
Of course, the risk refers to the accumulation of risks brought by layers of complexity.
Once any token in the chain encounters a crisis, then the associated assets and applications upstream and downstream of that token will also encounter problems.
For example, if stETH encounters a crisis, not only will the stability of the upstream Ethereum PoS mechanism be greatly affected, but also various downstream re-staking protocols accepting stETH assets, such as Eigenlayer, will face risks.
In summary, the costs, benefits, and risks of the four methods are listed as follows:
If we must prioritize the four methods from the project party's perspective, to maximize capital efficiency, the ranking is as follows:
Token issuance expectations first: low cost and high returns;
Project collaboration second: low cost, just exchange resources;
Third income incentive: high cost, requires spending real money to share platform profits;
Creating new assets fourth: highest cost, requires maintaining the liquidity of new assets;
But this priority ranking is based on the assumption that the project party wants to quickly establish market position and attract users while managing risks well and maintaining effective resource utilization.
In practice, the project party needs to adjust these priorities based on its own resources, market conditions, and specific business goals.
Additionally, these methods are not mutually exclusive; the project party can combine these strategies based on different stage needs and market feedback.
