Go2Mars Research

In this article, farmer refers to the group that conducts liquidity mining in the protocol. They provide liquidity for the protocol and obtain rewards from the protocol; while LP refers to the group that provides liquidity for the protocol tokens, and the income comes from transaction fees.

introduction

Traditional liquidity mining faces several major problems and challenges. First, the tokens rewarded by liquidity mining are often sold by farmers immediately after they are obtained, which causes the token price to fall, thereby damaging the interests of token holders. Second, the reward mechanism will distort the interest rate and price of the protocol, causing real users to be squeezed out and the actual use value of the protocol to be reduced. In addition, the management mechanism of liquidity mining rewards is often opaque, the distribution and purpose of tokens are unclear, and ownership is too concentrated. Finally, the reward mechanism may increase the security risk of the protocol, lead to the theft or loss of funds, and damage the credibility of the protocol.

The FOO (Fungible Ownership Optimization) model is a new token model that attempts to solve these problems in a number of ways. First, it merges the roles of farmers and LPs, making it necessary for them to hold tokens in order to receive rewards, thereby alleviating the selling pressure of reward tokens. Second, it uses option tokens as reward tokens, enabling the protocol to collect cash and provide support for token prices. In addition, the FOO model uses LP tokens as proof of voting rights, enabling token holders to participate in governance and receive protocol benefits. Finally, the FOO model ensures high liquidity of tokens in the trading pool.

Getting Started with Curve

Curve uses the Gauge system to incentivize liquidity

▪️For each cycle, CRV tokens will be released as rewards

▪️Reward tokens are distributed in different trading pools

▪️Voters vote to determine the emission ratio of reward tokens in different trading pools

The voting rights come from the veCRV obtained by locking CRV tokens. The voting rights are proportional to the lock-up time and the lock-up amount. As the number of veCRV in the hands of farmers increases, the CRV reward multiplier they receive will also increase, up to 2.5 times.

Core Mechanics

In the following section of this article, LIT is used as the protocol token.

Merge Farmer and LP identities

In order to completely suppress farmers' mining, withdrawal and selling behaviors, in the FOO mechanism, a farmer without any voting rights will not receive any reward tokens, no matter how much liquidity he provides.

In Curve, the proportion of token emission obtained by farmers is determined by the following formula:

in

b* is the weight when distributing rewards

b is the liquidity it provides

B is the total liquidity of the trading pool

ω is the number of veTokens owned by the farmer

W is the total veToken supply

This means that if the farmer does not have veToken, their liquidity share will be multiplied by 0.4 when determining the weight of the rewards they actually receive. When they have enough veToken, their weight will increase from 0.4x to 1x, which is reflected in a 2.5x increase in the actual share of rewards received.

In the FOO model, the formula becomes the following

This means that if the farmer does not have veToken, then the number of reward tokens they receive is 0, which forces farmers to become LIT holders, thereby suppressing sell-offs during each round of LIT release.

Option Tokens as Reward Tokens

In the FOO model, LIT call options are used as reward tokens instead of using LIT directly as rewards. The advantage of this is that the protocol can accumulate a lot of income regardless of market conditions, and allow loyal holders to purchase protocol tokens at a discount.

For example, let’s say the price of LIT is $100, and there is a call option token oLIT, which gives the holder a perpetual right to buy LIT at 90% of the market price. The protocol issues 1 oLIT to farmer Alice, who immediately exercises the option to buy 1 LIT at $90 and sell it on DEX at $100. The profit and loss statistics are as follows:

▪️Agreement: -1LIT, +90$

▪️Farmer Alice: +10$

▪️Dex LP: +1LIT,-100$

Compare this to regular yield farming where the farmer pays no fees to the protocol:

▪️Agreement: -1LIT

▪️Farmer Alice: +100$

▪️Dex LP: +1LIT,-100$

By comparison, it can be observed that the FOO model has the following characteristics compared with the conventional liquidity mining model:

▪️Cash redistribution: Using oLIT instead of LIT as a reward token effectively transfers cash proceeds from farmers to the protocol, and the token’s LP is not affected;

▪️Use incentive efficiency to exchange for protocol cash flow. In the FOO model, farmers receive less incentives, but in contrast, the protocol obtains stronger cash flow

▪️Effectively incentivize the secondary market: Compared with the one-time issuance of tokens, the issuance of options will reduce the pressure of secondary selling.

In FOO, the identities of farmer and LP overlap, and the profit and loss statistics become:

▪️Agreement: -1 LIT, +90$

▪️farmer-LP: +1 LIT,-90$

This means that when farmers receive oLIT rewards, they have the right to purchase tokens from the protocol at a discount and increase their ownership. Over time, protocol ownership will be transferred from holders who do not provide liquidity to farmers who provide liquidity, thereby optimizing protocol ownership.

Summarize

The advantage of this model is that it can effectively suppress the arbitrage behavior of farmers, enhance the consistency of interests between farmers and token holders, provide stable liquidity and cash flow for the protocol, and promote the long-term development of the protocol. The disadvantage of this model is that it may reduce the incentive efficiency of farmers, increase the complexity and risk of farmers, and limit the freedom and flexibility of farmers.