Posted on Oct 25, 2023Read on Mirror.xyz

R.I.P. Liquidity Mining: Epilogue

Liquidity Mining

$$October 1st, 2017 - October 19th, 2022$$ $$[Epilogue - October 19th, 2023]$$


By the supreme edict of your el jefe, the Obituary of the Death of Liquidity Mining was expertly forged by the flourish of my pearl inlaid quill, and swiftly dispatched upon the blockchain. My loyal Pearl Labs interns, laboring tirelessly under my scrutinous gaze without luxury of recompense, accomplished this feat precisely one year ago. The solemn and somber Obituary was subsequently graced by an exorbitant procession of countless mourners, whose numbers swelled as if summoned by the heavens themselves. Upon the grand stage of this accomplishment, I magnanimously accepted and prominently adorned many Nobel DeFi Prizes (not really) upon the exalted expanse of your jefe’s desk, all thanks to my pioneering solution to world hunger the DeFi incentive dilemma: the DAO Share Options (DSO) incentive program & the twAML (Time Weighted Average Magnitude Lock) whitepaper. Following the solemn pronouncement of the Obituary, tears fell in a synchronized cadence from the eyes of many yield farmers, their descent mirroring a solemn percussion upon the frigid concrete floors of their subterranean basement chambers, conducting a symphony of anguish, reminiscent of a cacophonous chorus one would find in a South Park episode of irate blue-collar American laborers united in a collective cry of resentment, bellowing as one, "That damn Tapioca, they took our four digit APY’s!"

However, many of its more discerning readers saw not only an alternate path to embark upon, but witnessed their inaugural glimpse of an entirely new world emerging within the Singularity. Dawn broke over the alien landscape, and the sails of curiosity and excitement unfurrowed, all to set sail into the newly charted waters of salvation. They didn’t merely peer through a new lens, rather, they donned the kaleidoscope itself, seeing the multifaceted intricacies of decentralized monetary policy once left abandoned, now finally reveal itself in a mesmerizing dance of refracting lights. These readers consisted of front-runners protocol contributors, liquidity providers, and power users. What very few realized, however, was how terminal our patented flywheel’s cancer was, the prognosis was truly dire. As the Obituary aged, the malignancy only continued to spread throughout the bodies of our beloved protocols, their alleged “flywheels” stopped turning one by one- the hamster’s we all knew and loved, once endlessly racing for unsustainable yields inside of them, were now too sick & sedentary from the Sisyphean triathlon they were programmed to compete in, to continue forging on the circular negative sum path(s).

As many did not foresee the passing of our dearly departed, eyes were thrust wide open to the looming harbinger of collapse; the single greatest dilemma faced in DeFi, even still today, is a lack of sustainable incentives. This is the very reason I forgoed the finer things afforded to the jefe to instead take up the mantle of devising a comprehensive solution to the very problem exactly one year ago (foresight, my frens). DeFi is but an ocean, Liquidity is its water, and Incentives are Rain. In the eerie silence of the bera’s desert, DeFi protocols stand as parched cacti. They await not salvation but rather the chilling yet sweet final embrace of the "Wind Down" Snapshot proposal’s euthanasia, for the spectral hand to lead them to the ethereal realm, where their existence will hopefully find peace & sustainability in the haunting depths of untracked tokens inside cryptographic coffins throughout the catacombs of shitcoinery.

Now that we’ve long since poured one out for the dead homie, and had our time to grieve- while time is supposed to heal all wounds, it surely hasn’t mended the grievous wounds inflicted upon DeFi. Hence, why an epilogue to the obituary was prepared, to finally reach the closure we have all yearned for, and to hammer the final nail into the coffin of liquidity mining, ensuring the forkers grave diggers relent on trying to resurrect what’s best left to rest. This epilogue will analyze the dysfunctional decentralized finance household post the sudden passing of its matriarch, Liquidity Mining, in October of 2022. In summary, Liquidity Mining, born to parents, IDEX, just five fateful years ago on Hollow’s Past, experienced its first teenage heartbreak when it and its date, FCoin, lost their bid for prom queen & king to Binance in 2018. After a makeover by Synthetix shortly thereafter, she then tied the knot after finally finding true love with her now widow- Compound. This set the stage for the “Summer of Negative-Sum Love” more commonly known as “DeFi Summer”. Except this Summer was not in 1967, but 2020- and instead of hippies we had yield farmers, instead of LSD we had Liquidity Mining, and instead of The Beach Boys we had SushiSwap. The yield farmers tolerance grew to ever rapidly increasing APY’s, and Liquidity Mining, due to the mounting peer pressure, spiraled into a deep addiction and tragically passed from a massive overdose- with Terra, Geist, Yams, among many others unsustainable & adulterated yields showing up in the Coroner’s final toxicology report.

Liquidity Mining was loved by farmers harvesting magic internet money from protocol owned beanstalks, and hated by hordes of holders of tokens that now bear the same value as Argentinian Pesos. Secondarily, this epilogue is needed to address the specter of Frankenstein looming in our resident gigabrain, 0xRektora’s laboratory, as one of the preeminent heirs to our dearly departed’s fake plastic crown in late 2022: our very own oTKN. Andre Cronje with Keep3r Network & Fixed Forex birthed the oTKN (oKP3R) in October 2020, where shortly there after it was then discovered to be left for dead and ultimately succumbed to chronic neglect as the red headed stepchild to Cronje’s newly born & favorite son- Solidly and ve3,3. The oTKN entered incentive purgatory by March of 2022, with Cronje’s departure from the space. After 0xRektora found and placed the young oTKN into the Shrine of Resurrection after some careful yet significant improvements: oTKN’s life was restored, more alive than ever before, handing out coupons like candy on Halloween (wait, coupons?). But above all else, the forest has been missed for the trees, and the need has arisen to dispel the notion that call options themselves are the sole solution to creating sustainable incentive models. Actual Call options, while we do assert are the best vehicle to tackle the incentive dilemma, the right driver and destination are far more important. Let’s be real, regardless if you’re in a Lamborghini Gallardo or a bicycle, you don’t want to end up driving shotgun with an armed & under-the-influence Bitboy manning the wheel, traveling through the dark forest without a map.

In limbo, our punishment is a denial of paradise.


Before continuing, let's jump in our DeLorean and hit 88 mph to back up a year- why was Liquidity Mining’s Obituary so impactful? The bear market. In up-only adderall fueled euphoria, showering free token emissions to mercenary liquidity providers works, well, actually, not really at all (e.g. FCoin is tots gonna dethrone Binance with its “trans fee mining”, just like Craig Wright will one day prove he’s Satoshi). But wait- what do you mean it doesn’t work?!

As one now imprisoned, adderall addicted, imperial Chinese harem involved, Bernie Madoff-lite explained (or admitted) about liquidity mining: “DeFi is like a cardboard box where you can put $1.00 in and get $2.00 in return”. (wait, wut). If you cut through all the buzzwords, the traditional DeFi token economy truly boils down to “spray worthless tokens without a driver considering the cost of growth nor controlling the amount needed to be distributed to mercenary liquidity providers in order to spur & maintain growth. Pray TVL number goes up regardless of the utilization or demand of liquidity in the system through the incentive vehicle of liquidity mining- distributing free tokens en masse without a care in the world. With a desired destination generally entailing obtaining the holy grail of obtaining the biggest meaningless TVL number of them all.But wait, then what? Soon, my fren. Liquidity Mining did accomplish this pointless pursuit with several partners in crime many times over- albeit all with short time horizons. Once the incentive token was dumped enough times that the founders of the protocol said to themselves “at least they didn’t ghost us” (sorry- horrible halloween joke), the protocol becomes crippled economically- no longer able to hold onto its fleeting and near valueless acquisition of rented liquidity.

The Liquidity Mining model was completely fundamentally flawed, giving away more lasting value than it ever momentarily received. For a sustainable model, the basic premise has to entail real value capture (destination), and the economic stimulus having the largest impact possible while minimizing the deleterious impact as much as possible (driver), or it will fail, regardless of the vehicle. Many of you know my patented phrase “To get value, you must give value”. Which, the quote simply means obtaining allocative efficiency- incentives that are constantly aligned with consumer preferences (the free market), while the state of output of incentives has a price equal to or below the cost of the incentives themselves.

“Allocational efficiency, also known as allocative efficiency, is a characteristic of an efficient market where the optimal distribution of goods in an economy meets the needs and wants of society. This occurs when there is an optimal distribution of goods and services, taking into account consumer’s preferences. Virtually all resources are limited; therefore, it is essential to make the right decisions regarding where to distribute resources in order to maximize value.”

If an incentive program is allocatively efficient, you can near infinitely sustain growth stimulus- sustainable incentives.

However, we still have an unanswered question: What really was the endgame of liquidity mining, anyway? That’s the great part, there really isn’t one. If you read between the lines and look at the intention, however, it always boils down to “Inflate & Rent Liquidity Forever,” that’ll surely work.

Moving swiftly along, why is TVL meaningless, though? Isn’t that what every DeFi protocol pursues, and the metric we all appraise DeFi protocols value with? That’s (a big part of) the problem. We need to trace back to TVL’s origins first to understand what exactly it is that we’re discussing. The “Total Value Locked” or “TVL” metric was created by DeFiPulse, on February 23rd, 2019. Even during its humble beginnings, TVL was a meaningless metric: for example- counting both the deposit of collateral & borrowed amount in a loan on Compound as TVL - e.g. user posts 100 ETH as collateral, borrows 50 ETH, Compound thus has 150 ETH in TVL (no it doesn’t, it has 100 ETH in “TVL” in the most hand-wavy definition possible, more on that later). Or, counting all the liquidity deposited in pool1 & pool2 as TVL- e.g. “pool1” being the total dollar amount staked of self-issued worthless governance tokens, and “pool2” being the total dollar amount staked of self-issued worthless governance tokens in an LP pair as TVL (double no- self issued governance tokens certainly shouldn’t count towards TVL), etc.

Most importantly however, TVL, as we must have all forgotten, stands for “Total Value Locked”. Firstly, a basic question: do you know of any “TVL” that is actually locked, or even has much of any appreciable value? There may be some examples out there, but for the most part- let’s make up a simple scenario to illustrate- we have a protocol called “Cardboard Box”, with a smart contract that distributes “SHTCN” token incentives (great name, huh?) providing 100% annual interest against user deposits of USDC. Users witnessing this, rush to deposit their USDC to receive the huge and totally sustainable yields consisting of the prized SHTCN token incentives- the smart contract quickly amasses $1m in USDC- thus, $1m in TVL.

Is Cardbox Box’s “TVL” locked? - No, users can (and will) withdraw at any time.

Does Carboard Box’s “TVL” have any value? - No, while it does have $1,000,000 USDC deposited, and $1m USD is $1m USD, the problem is, $1m USDC currently lent to the Box is different from $1m in liquid USDC in your hardware wallet. Let’s think, if I made a smart contract that’d lend you $1,000,000 in USDC, but only for 12 seconds (one Ethereum block) before the USDC is burned, does that have any value to you? Probably not much. If in the same example, I make a smart contract that would lend you $10,000 USDC for a year before the USDC would be burned, you’d probably select the latter. Therefore, time actually is money, and the value of time is quantifiable.

“But el jefe, if the TVL metric is this stupid, why did it become so prominent? What was the logic behind the TVL metrics importance from the initial supporters of it?”, (ofc, outside of the prior top metric “DAU” (Daily Active Users) somehow being even dumber, and putting aside big TVL numba gibs higher social hierarchical status) I promise, you’re going to love this, here goes nothing: because the Cardboard Box Protocol has $1m USD in the box at the moment, the alleged “value” is predicated on the fact that others decided that there should be $1m in the box (as that is what is (currently) deposited), therefore, the rationale is that the box has $1m in “value”, because of the consensus of depositors who collectively decided to put the million smackers into it. You see how extremely circular and ridiculous this logic is? In reality, firstly, the $1m is actually a liability as depositors are lending the capital to the box, and even more importantly, the Box’s cost of renting the $1m USDC through paying out 100% annual interest to the depositors in SHTCN token incentives obviously outweighs the fees being captured, because there are none- therefore it is obviously unsustainable as it’s operating completely cash flow negative- the actual total value is negative 100%, worthless, because in plain terms: it paid out $2,000,000 in SHTCN permanently (100% APY) to rent $1,000,000 temporarily.

Say hello to 99% of DeFi.

In lust, unrelenting winds of unquenchable desire spiral around us as punishment for being led astray by our worthless desires.


This is why Uniswap and many others are able to keep their top spots without incentives, (besides having better tech), as the traditional incentive model is the problem, not the solution. Consider Compound's Liquidity Mining Program, which catapulted it to the world's #2 protocol by TVL, with over five times Aave's TVL at its peak, to now sit at less than half of Aave’s TVL. Or look at LooksRare’s meteoric rise with its LOOKS token reward program which ignited a fire to allow it to outpace OpenSea in volume for several months, to now not even being in the top ten NFT marketplaces by volume. Incentive models are pivotal in any sector where specific behaviors or outcomes are sought, but they can be even more harmful as they can be beneficial. Shout out to American Airlines AAirpass holders, the OG yield farmers. However, imagine for a second if Compound or LooksRare could have sustained their success? That’s precisely what makes this dilemma so important- the stakes could not be higher.

But let’s really stop for a moment and think, this is honestly shocking to yours truly, does nobody else see how flatly absurd this incentive model is, and why it constantly fails? Anyone could “succeed” with the TVL metric in any field, and here’s an example to prove it. Open the Cardboard Box coffee shop (coffee farm protocol) next to a Starbucks (incumbent protocol) and charge $5.00 for a cup of coffee (fee), half the price of a cup of coffee at Starbucks. Then, attach an IOU to every cup sold that allows the customer to come back and collect $5.00 back from your cash register, plus an additional $5.00 (analogous to token incentives) whenever they please. Customers will buy the coffee even if it tastes like the TikTok Pink Sauce mixed with sewer water and Hepatitis-C- some will even buy it just to collect the $5.00 profit (yield farmers). The profits from coffee sales (fees on a protocol) will surely outpace the IOU’s being collected on, right? Let’s really think - what would obviously happen?

Cardboard Box Coffee will have ten times the amount in their cash register by the end of the day (TVL) then Starbucks does, even probably in a month's time frame, even maybe more. Let's say Cardboard Box Coffee sells $100,000 in coffee the first day- speculators then emerge who opine that the company is worth $100,000 because, well, there’s $100,000 in the till, and invest in Cardboard Box equity (VC’s), and then maybe even Cardboard Box Coffee goes public on the ABCTX Exchange at a $1,000,000 USD valuation, and many more invest (retail investors). Dear reader, you probably have already deduced there’s a critical issue. The Cardboard Box Coffee customers can come collect that money from the register against their IOU’s at any time- and that they will do.

By the end of the month, as you’ve probably already deduced, Cardboard Box Coffee will be out of business. Most of the customers would similarly realize they need to get that $10.00 out as quickly as possible (yield farmers and a bank run). The VC’s of course have already sold their shares, but the retail investors now have the equivalent of 1923 German Marks, and the customers who didn’t redeem their IOU’s can’t collect $10.00 from the dust now lining the registers, ending up like LPs to Lehman Brothers in 2008 (or a web3 VC, or Anchor Protocol)- this must be starting to sound a lot like DeFi (and something far more insidious, too…).

A quick statistic from the original Obituary that’s very poignant to this exercise:  “A whopping 42% of yield farmers that enter a farm on the day it launches exit within 24 hours. By the third day, 70% of these users withdraw from the contract and never return.” (source: nansen)

But why would a large selection of customers redeem their IOUs as quickly as possible? Because like the yield farmers shown in the data point above, they know there is no chance that the shop can sustain the pay-outs long-term. The only customers who have any chance of profiting from the IOU’s are the ones who redeem their IOU’s as quickly as possible, and due to this knowledge, that they will do. This is called employing the pure strategy- the singular strategy that will yield the only positive outcome. Yield farmers aren’t acting maliciously, they’re literally being dealt a king and an ace in a game of Blackjack with protocols hoping for them to hit on their 21. The only logical strategy for users of protocols employing our dearly departed liquidity mining is to farm & dump, and that’s why the cryptographic cookie crumbles the same way every time.

Therefore, not only is the destination that DeFi protocols are predicated on, rented liquidity or “TVL”, an open lie- but as I’ve outlined in painstaking detail, the entire economic model DeFi protocols are based on, our one and only recently departed soul (liquidity mining), is utterly nonsensical with the protocols worthless governance token™ having a 0% chance of survival. Why I went into this level of detail however is to show that protocols employing liquidity mining are literally incentivizing users to act in the opposite way that they desire, all in a negative sum pursuit for a meaningless and valueless metric. In DeFi, protocols talk about “sticky liquidity” and throw a veTKN and some gauges on top of a liquidity mining program and call it a day- you’re literally forcing your LPs to farm & dump, this has failed over and over and will never succeed.

As we also now understand, liquidity deposited into a protocol is not valuable in of itself. The true value of a protocol besides its balance sheet (treasury) is its liquidity custody time, utilization, and demand. The more a system is able to capture dollars at a positive cost basis for larger periods of time, the ability for the system to put the dollars inside of it to work, and the more people are willing to pay for the dollars in the system- is actual value being created- this is called unit economics. Currently, protocols take none of these very important metrics into account when designing (forking) incentive programs. Even for example: if your protocol got a TRILLION DOLLARS in TVL: How long will your protocol have custody of the capital? Can your protocol even put that much capital to work? Does your protocol have enough demand for that much capital? And finally, what’s your protocol's cost / benefit in all of this? All unanswered in current DeFi monetary policy.  Gee, I still can’t figure out why most protocols have more contributors than users.

Unit Economics are a foundational measurement of the sustainability of a business. Using Unit Economics, we can shoe horn it to calculate DeFi protocols unit economics. Emissions & Operational Costs are Expenditures, Fees Collected by the Protocol & Token Holders are Revenues, and Treasury Inflows are Asset Inflows (or Outflows) to the Balance Sheet. The primary way to be sustainable, regardless of the incentive vehicle (call options, bonds, liquidity mining and its many incarnations, etc) is by the protocol having positive unit economics- protocol expenditures being less than revenues.

The following data disregards Balance Sheet (Treasury) inflows & outflows, but don’t worry dear reader, that will come shortly. These three metrics when weighted against one another can accurately determine the prognosis of a protocol’s sustainability, profitability, and ability to scale. Let’s look at a few protocols with these metrics in mind.

In Gluttony, a vile storm plagues us, symbolizing our programmatic lives of over-indulgence.


(Note: “Fees” are the share of protocol fees that have been captured by the protocol or its token holders for accessing its liquidity and/or services, and do not include fees paid out to liquidity providers. “Expenses” are the dollar amount in token incentives distributed by the protocol to rent liquidity and/or create a user base as well as operational costs. “Incentives” is the same metric, without operational costs, if not available or applicable. The percentage indicates if the protocol is capturing more in revenue then it’s losing in incentivizing usage & liquidity. All incentive data is sourced from TokenTerminal, fee data from DefiLlama, unless otherwise stated.)

AAVE: +72.95% (+$7.74m) - ($10.61m in fees - $2.87m in expenses)

GMX: +51.9% (+$16.23m) ($31.24m in fees - $15.01m in expenses)

Lido: +20.2% (+$8.78m) - ($43.52m in fees - $34.75m in expenses)

As you can see, these are three of the most entrenched protocols in their respective categories, who have also largely winded down their incentive programs:

AAVE: -97% [$125m in incentives (2022) to $3m in incentives (2023)]

Lido: -85% [$91m in incentives (2022) to $13 in incentives (2023)]

They represent outliers that withstood unsustainable liquidity mining programs from the sheer demand of their services, good timing, or a mix of both. The important thing to takeaway on why these protocols are so highly valued however simply comes down to their cash flow. For example, every $1.00 GMX spent on incentives, it essentially gained $2.00 in fees in return, which proves that GMX is held in high regard for good reason, and that even with the deceased liquidity mining incentive vehicle (esGMX), with positive cash flow you can sustain a protocol, however difficult it may be with a poor and unoptimized incentive model. GMX is extracting massive value from liquidity in their system, proves its ability to scale, while this nugget of information also perfectly explains what “real yield” really is- positive unit economics.

In comparison, let’s take a look at three newer protocols which have garnered significant market share utilizing liquidity mining “2.0” (not really, will explain shortly) model(s):

Lybra (Liquity Fork): -86.26% (-$8.41m) - ($1.34m in fees captured - $9.75m in incentives)

Note: data determined by using the current price of LBR at time of writing which is near an all time low, and minimum possible emissions notated in the Lybra docs, thus being best case.

Velodrome: -91.72% (-38.89m) - ($3.5m in fees - $42.29m in incentives)

Note: Incentive data sourced from TokenTerminal and fee data sourced from DefiLlama. Does not include 3M OP token incentives Velodrome received in November of 2022, which at current market prices is a further $4.92m in expenses, nor any further OP token grants received and distributed as incentives in 2023.

Radiant V2 (Aave V2 Fork): -23.75% (-$4.24m) - ($13.61m in fees - $17.85m in incentives)

Note: This data is not year to date (YTD), and instead represents March 2023 to today due to Radiant V2 launching in March, and is based on independent analysis of RDNT token emissions, averaging the price of RDNT to $0.2975 using DefiLlama’s RDNT token price data from March 2023 to today, then finally using Radiant V2 fees reported on DefiLlama from March 2023 to today. TokenTerminal reports a vastly different figure of $904.7k in RDNT emitted YTD. At the bottom of this article, the analysis used will be attached via a Dune Analytics link for review.

All three of these protocols are a little over a year old, and are operating on a scale of bad to worse on negative cash flow. In their defense, this isn’t atypical- startups generally do not turn a profit and have negative cash flow. However, this data serves to point out that “F2E” (fees to expenses) would be a far more optimal metric for evaluating a protocol's “value” than meaningless TVL. However, now that the stage has been set, you just activated my trap card. Let’s look at one last set of data:

Current DeFi Treasuries (minus self issued tokens):

  1. OlympusDAO: $136 million

  2. Lido: $65 million

  3. MakerDAO: $50 million

  4. Aave: $32 million

  5. Synthetix: $17 million

Olympus, even today, has the largest Treasury in DeFi by 3x, and has more than 5X the Treasury size than the most profitable protocol we just analyzed- Aave. Take a moment to let this profound realization sink in. This data we just examined underscores the critical importance of analyzing and modeling the future of DeFi incentives. This vividly illustrates that, beyond any theoretical functionality, the lifeblood of a DeFi protocol's success lies within its incentive model.

Ultimately, Olympus had introduced a singular but critical innovation that revolutionized the lengths that DeFi monetary policy could take a protocol, shifting vehicles from our dearly departed liquidity mining, to bonds, and redefined the destination from TVL to POL (Protocol Owned Liquidity). Remarkably, even with Olympus being far past their infamous days of dominance, their Treasury still stands as a towering presence, outshining even the most profitable and firmly established protocol’s Treasuries in the realm of DeFi. I still regard Olympus as the first wave of “DeFi 2.0” (as fucking cringe as the numerical defi generation bullshit may be).

But why does a treasury matter? Liquidity is King. This is why “DeFi 2.0” was predicated on capturing POL with protocols such as Olympus & Fei. While these protocols shifted the destination from TVL to POL, they “failed” as they were still left driverless and in the wrong vehicle (bonds), generally were still employing liquidity mining, and had a model (3,3) predicated on Prisoner’s Dilemma game theory. As Compound, Synthetix, and many of Liquidity Mining’s spawn have found out, once you turn the money printer on (liquidity mining), you can’t turn it back off. When you turn on the liquidity mining spigot, the liquidity locusts come like maggots to a corpse, and they will soon control your plutocratic governance. It’s akin to a business paying the Mafia protection money- let’s think, is Lucky Luciano going to vote yes to decrease or stop their monthly payments? No.

But to the question posited, POL (protocol owned liquidity) is the truest value obtainable. When you wield control over the waters of liquidity within the vast ocean of DeFi, you reach a point where the need for external incentives- the rain to water the crops, will become completely obsolete. Thus why the TAP token has a fixed supply- infinite inflation is no longer necessary. Let’s also not forget- liquidity begets more liquidity- a self amplifying effect. This is why Maker has stood far and above any DeFi protocol to date without any incentives, as the system has so much liquidity that act as a magnet for obtaining even more liquidity, especially also proving that CDP stables are highly scalable without giving up price stability or censorship resistance with voodoo magic and delta gamma theta hedged liquid staking derivatives sitting on CEXs, it all comes back to incentives. The question now is, “Matt, I'm sold, we get billions in protocol owned liquidity, but that’s a lot of socks you’ll need to sell, how tf do we get there?”

Glad you asked, dear reader. Let's pause for a moment and contemplate what Aave's treasury would look like, had they only simply opted for bonds or call options as incentives instead of liquidity mining (R.I.P). We can actually answer that: in just two years, Aave would (conservatively) wield control of $350 million god damn dollars and have the largest treasury in DeFi by a factor of two (based on their $450m in token incentives paid out from 2020-2022, and applying a 30% market discount as the average incentive akin to our twAML/DSO, on top of their existing treasury, source: TokenTerminal). While your jaw is still on the floor, let me pose another intriguing question: What would happen if you merged the positive unit economics of a real yield pioneer like GMX, the destination of amassing massive amounts of POL like Olympus (plus truly locked liquidity), used call options as the incentive vehicle, and for the first time ever had a proper driver to reach allocative efficiency of the distribution of the incentives? If the "aha" moment has yet to strike, I’ve just described the first truly sustainable incentive flywheel with near infinite scaling properties, that I opine will propel us into the future.

Greed is the voracious beast that devours both wealth and souls, forever ensnaring its victims in a bottomless abyss of insatiable desire of what could be.


As one Scoopy Trooples of Alchemix once proclaimed, “Liquidity Mining is an Addiction,” and I’ll add to that quote- an addiction without dopamine- no reward. I said previously in this piece, the bear market was the reason our dearly departed’s obituary was so well received, why the bear market? Simply put, no one cares about sustainability while ludicrous yields are hitting the yield farmers' veins, like Tyrone Biggums during his $450,000 crack party after selling his house.

And as many critics opined after the Obituary was released, “Liquidity Mining is sustainable during an up-only euphoric bull run”. They believe this because it’s partially true- no matter how much sell pressure the incentive model creates, there’s always enough buy pressure from the naive gamblers who appear during the mania of a bullrun to pull the proverbial slot machine handle of the next PooCoin shitcoin listing, which effectively subsidize those trillion percent APYs. However, the bull market is now long gone. Rob & Jenny are back, and that wasn’t actually Tyrone’s home that he sold. Not only is it not sustainable, as I’ve outlined, it’s a negative sum and highly paradoxical exercise- subsidies or not. In the current bera, right now, many of us can hop on over to our Fidelity accounts and snag a short-term Treasury Bill boasting a 5% APY. So, where are these individuals who are willing to shoulder massive risks to use liquid staking derivatives or lend to Aave for a measly 1-3% APY? Hello? Anyone still there?

Before (some of you) say it, the answer also isn’t “Don’t fret, Matt! I’ll open a liquidity pool, let user’s deposit USDC, and I’ll buy U.S. Treasury Bills from Uncle Sam and bring the yield back on-chain!” I know you thought you were a genius there for a second, and there absolutely is a place for tokenized securities- yours truly is actually pretty excited about certain implementations, however the regulatory risk, custodial risk, and the laws needed to be abided by (like, I don’t know…KYC?) aren't reeaallyy congruent with RWA’s being the solution to decentralized finance’s current problems. Additionally, let’s be real, who are these people who are going to buy Treasury Bills from 0xNotAScammer’s protocol over Fidelity or any tardfi institution? Regardless, even with enough hand waving and mental gymnastics on the centralization and risks of tokenized securities, it’s a short term solution for a long term problem, anyway- those treasury bills 5% APY aren't going to cut it when GTX hits the streets, the amphetamines are cheap & plentiful once again in the Bahamas, and yield farmers are laughing at pedestrian 100% APYs.

At its core, DeFi = Yield, universally accessible yield that doesn't care about your background or traits; in the dark forest, we're all just a bunch of 0x-somethings on a ledger, anyway (until account abstraction). But strip away that yield, and suddenly, this whole "DeFi thing" really loses its luster. This is why the current state of DeFi consists of airdrop farming and buying enough fake X followers to whip up enough task monkeys (❤️ Jor) to complete vapid Galxe & Zealy campaigns to “build” a “community” aka sybil worthless airdrops so that the veecees invest in seed rounds seeing the “hype” around the “protocol”. Let's not even get started on the plummeting value of blockspace due to the dire over production of it, all to feed the veecees insatiable appetite for losing a lot of people a lot of money, and these “novel”, “innovative”, “DeFi 3.0” protocols low effort forks that are certainly aiding in the demand for that blockspace. With your el jefe’s sudden emotional outburst out of the way, there must have been some attempt(s) to fix the state of DeFi in a year, right?

Oh yes, yes there were. As soon as the Obituary dropped in 2022, the attempts certainly began.

A list of announced or released “oTKN’s”:

  1. Timeless/Bunni (oLIT - live)

  2. Premia (Call Option Liquidity Mining - announced)

  3. Yearn (oYFI - announced)

  4. Bond Protocol (white labeled oTKN - announced)

  5. Curvance (oCVE - announced)

  6. Velocimeter (oFVM, oBVM - live)

  7. Retro (oRETRO - live)

  8. Dopex (OLP - live)

  9. Vesta Finance (oVSTA - announced)

  10. Blotr Protocol (oBLOTR - live)

  11. Dolomite (oARB - proposed)

  12. Umami (oARB - proposed)

  13. Oath Foundation (oOATH - announced)

  14. Rodeo Finance (oRDO - announced)

  15. 0xTransmute (white labeled oTKN - announced)

  16. PepperDEX (oPEP - announced)

  17. Toupee Tech (oWIG - announced)

  18. Protectorate (oPRTC - announced)

Naturally, the industrious interns of Pearl Labs embarked upon an unrelenting quest to extract every morsel of data from these enigmatic "oTKN's". Your sagacious jefe orchestrated their transformation from front-runoors into unknowing beta testoors with masterful foresight, until…something was realized.

Take oLIT for example- Houston, we have a problem. There’s no expiry, and no strike price. It’s a perpetual expiry incentive with a constant 50% discount to the market price…which isn’t an option, or even a bond, but a coupon. An example to exemplify the difference: “here’s a voucher to get this $10 shirt at 50% off forever” vs. “here’s a voucher to get this $10 shirt at $5.00 until next week”. If the shirt is marked down to $5, in the former example, the customer could purchase the shirt at $2.50 if it dropped in price to $5, and in the latter example, even if the shirt is now $5, they can still only purchase at $5. Secondarily, if the shirt is marked up to $25.00 in a month, the former can purchase it at $12.50, and the latter can’t purchase it because their voucher expired. You’re losing all of the benefits an oTKN brings, and even bonds. This continues on throughout all of the live oTKN’s…being…coupons, other than oKP3R, therefore, the only legitimate oTKN or call option incentive we can observe at this time remains Andre Cronje’s oKP3R.

This data admittedly shocked me. In one year, from September 2021 to September 2022, oKP3R had $8m in redemptions.

Interestingly, the KP3R token fell 53% over this time-frame, even with my contentions with oKP3R such as the long expiry of a month, and it’s flat discount. On top, KP3R is extremely illiquid, and Andre Cronje even had exited DeFi in March of 2022, which would all act as very large motivators for negative price performance. Shockingly, in comparison, an index of the top ten DeFi tokens by their protocols TVL fell 80% in the same time frame. ETH itself fell 59%. While it’s one anecdotal piece of evidence, it lends a lot of credence to my thesis that call options are the best incentive vehicle for DeFi.

Following the profound revelations ensconced in the Obituary, wherein the blueprint of call option incentives detailing the reanimation of the oTKN was unveiled, a frenzy shortly ensued across DeFi- it seemed that everyone and their loyal canine companions, inspired by the grandeur of our vision, fervently rushed to announce or release their own rendition of the oTKN with its new lease on life. While I had intentionally refrained from divulging the entire blueprint, for I as el jefe maintain a masterful grip of my cards close to my chest with an air of mystique, it is undeniable that a multitude of other valiant endeavors had also been set in motion, all aspiring to forge the same hallowed path towards a sustainable incentive paradigm.

Anger is the tempest that blinds reason and steers the ship of the soul into the treacherous waters of eternal turmoil.


One such means was through vesting liquidity mining token incentives in one way or another. This practice was recently popularized by GMX’s esGMX, which has since been mostly winded down. But like everything- is far from new. Dodo, a decentralized exchange released in 2020, released their DODO Carnival incentive program. Dodo distributed DODO tokens through liquidity mining, but added a six month lockup to collect the rewards. The problem with vested token incentives are, while it may be quite obvious to some, let’s go back in time and return to the now bankrupt Cardboard Box Coffee for an example! We slightly modify the model- the IOU’s customers receive after paying for their $5.00 cup of coffee that once would enable them to collect $10 at any time, now only allow them to receive $2.50 per week for four weeks. What happens? Cardboard Box Coffee goes bankrupt in a year, maybe two years, instead of six months. The same problem still exists in that customers (LPs) are “getting something for nothing”. Vesting the emissions does mean the time frame till death is elongated- as the sell pressure is spread over longer time frames- but the survivability still remains very much finite, and the protocol still has nothing to show for it at the end of the near pointless & paradoxical exercise. The sell pressure will continue to mount until it overwhelms the system. No system can operate in near complete losses forever.

The next was the viral ve3,3 “flywheel” which was supposed to imbue the most positive properties of Olympus via it’s rebasing to curb inflation, and Curve’s vote escrowing into one “super” model, when in reality it was the worst of both. Most of the ve3,3 flywheels died quicker than they were born, such as Chronos.

In my opinion the reason we have seen so many Solidly forks is thanks to TVL evangelists attributing Velodrome’s rented liquidity success story to ve3,3 and not multi-million dollar OP subsidies and good timing. On paper, ve3,3 incentivizes users & protocols to hold/buy & lock their token to increase the global emissions and control the gauges, respectively. Users generally will not lock a hyper-inflationary token, regardless of yields, due to carry cost. Cronje, knowing this, decided to inflate the lock positions with the overall circulating supply to circumvent this. In reality, this made the situation worse, as we all know the solution to inflation is…more inflation. The secondary motivation of ve3,3 is to incentivize protocols to “bribe gauges” or purchase the Solidly forks token and lock it. With this investment into an illiquid lock position, the “briber” is now able to direct the forks incentives to their desired liquidity pool(s). Protocols gain “success” from this, just like they gain “success” from liquidity mining itself. The core problem of distributing free tokenized incentives en masse isn’t solved, just shifted around to another party.

The next model was the “loyalty tier” liquidity mining model. This is also not new, and was taken from everyone’s favorite CeFi ponzi scheme- Celsius. Celsius, upon seeing the success of Compound COMP reward program, of course needed their own reward program to maximally scam individuals by suckering them into depositing assets onto the Celcius lending markets with attractive “low risk” yields. As they realized the CEL token would be nothing more than a farm & dump token akin to COMP, they decided to create what effectively were “loyalty tiers”- not only suckering people into lending their assets, but buying their worthless token on top. If your CEL balance on your account was equal to 5%-10, to 25%-100% (yikes) of your total account balance, you’d receive boosted yields (in CEL), on top of the real yields, of 5% to 25% APY.

This model was brought back with a small twist on multiple protocols, requiring users to lock 5% of the protocol's governance token for one month to a year, relative to the size of their deposit, to earn the right to receive liquidity mining emissions. Longer the lock, higher the yield. However, if you go below 5%, no free tokens 4 u!

As Celcius proved, this will create buy pressure (subsidizing the yields). To add fire on the gasoline in the DeFi realm however, users are prompted to leverage up an asset when lending, to swap 5% of the borrowed amount into the TKN. This means, I deposit $10,000 in USDC, leverage it up 4x to $40,000, and $2000 of that $40,000 being lent is swapped into TKN, while also multiplying the TKN incentive yields I receive. This would imply a significant amount of TKN buy demand is through farmers applying leverage on lent assets, which is even more buy pressure subsidizing the yields. As with the Cardboard Coffee Shop example, no matter how many band-aids you put on a liquidity mining gunshot wound, the only thing you can change is the time it will take to bleed out.

Lastly, the “buy & burn model” re-emerged in a big way with Rollbit. My thoughts on Rollbit as a platform aside, token scarcity is important. Bitcoin’s entire model is predicated on scarcity (as we’ve all heard a gorillion times, there will only ever be 21 million BTC) and is also seen in Ethereum post EIP-1559*.* RLB has a fixed supply, and Rollbit uses their revenue to repurchase and burn RLB- this has an incredible psychological effect on the market, and is a simple but powerful implementation of reflexivity. To boil down what reflexivity is, most simply put it is a positive feedback loop in which economic expectations cause economic trends that substantially deviate prices from the actual fundamental reality. Essentially, our collective perspectives shape reality, even though reality should be fundamentally different. Wut? Huh? Take the Bitcoin halving event- we know that the per block reward will fall in half approximately every four years, and because of that, our expectations of how much the halving will impact the price of BTC become the reality- to the point that the price deviates massively to the up-side from the reality of how much the halving should actually fundamentally impact the price. Thus, Rollbit burning $1m in RLB this month will impact the price of RLB far more than the buy & burn dollar amont actually will, because of our collective perspectives on it. This is why we made TAP a fixed supply, when many liquidity minoors want a “get out of jail free” card to inflate forever. Reflexivity.

To boil this all down, simply put, no matter how you try to revive liquidity mining’s now oozing corpse- through vesting periods, the cha-cha slide, or even coupons- you’re giving away something for nothing. The practice of renting liquidity with free token emissions is completely paradoxical and counter-effective, no matter what package it’s in. Protocols are businesses, and while start-up’s often withstand operating losses in their early years to become profitable, there has to be a path to profitability. Repeat after me: TVL is meaningless, token emissions and operational costs are expenditures, fee generation is revenue, the treasury is the balance sheet.

Heresy is the fire that burns not only the flesh but also the very foundations of faith, where defiant souls stand as eternal testaments to the consequences of questioning divine truth.


We’ve thoroughly analyzed and proven the TVL destination of incentive models being fundamentally wrong, and opined that capturing Protocol Owned Liquidity (POL) is the obvious destination to be reached with incentives, it now has come time to talk about the vehicle, what many of us came to this Epilogue for- to discuss the oTKN or call option incentives.

First let's quickly recap- what the hell is a “call option”? To make it really simple, you have “calls” and “puts”- a “call” is a purchase, a “put” is a sale. “Option” is at the end of the phrase denoting it is “an option (and not an obligation) to buy (or sell) this asset”. The price that you can purchase the asset at is the strike price. Options also have expirations, and are generally short term in duration. So for example, let's say I give you a call option on ETH at $1000 with a one week expiry, that means I’m giving you the right to purchase ETH from me at precisely $1000, regardless of what the spot price (the market price) is, for one week. There also are European options, but for the purposes of this paper, we’re focusing on American options, which allow you to settle your option at any time up until the expiration date. Lastly, call options can be “in-the-money” (ITM), or “out-of-the-money” (OTM)- all this means is, “Is my call option’s strike price below the market price? Yes?” Then it is ITM or profitable to exercise, as you’re able to buy the asset below its market value, denoting profit. No? It’s OTM or unprofitable to exercise, your strike price is above the market price, and it wouldn’t make much sense to exercise the option, then.

Recap over. From the very moment we resurrected the oTKN, many rightfully pointed out when viewing our answer to the sustainable incentive dilemma through the lens of its predecessor, Options Liquidity Mining (OLM), OLM can somewhat be rightfully viewed as “liquidity mining with more steps(liquidity mining being sort of in the name). While Keep3r Network’s oKP3R (KP3R Call Option Incentive) does have some tangible benefits in comparison to liquidity mining, it’s easiest to describe the comparison by putting it in these terms: liquidity mining is a call option incentive with a 100% discount and infinite expiry, while OLM provides a flat 50% discount, one month expiry version of liquidity mining (thus again, options liquidity mining). Lastly, all of the profits captured from oKP3R were distributed to vKP3R lockers, which drains all of the potential benefits by shifting the 50% cut pay-out to lockers instead of LP’s. The difference between giving two oKP3R call option incentives out, versus giving one KP3R liquidity mining incentive out, becomes basically identical with some small benefits to sustainability imbued in options.

The “More Steps” part of “OLM is Liquidity Mining with More Steps” is also correct because, options cause severe UX issues. An LP is now faced with needing to manually redeem options at regular intervals, before the expiration, and ensure their option(s) have remained ITM. Man, wouldn’t it be cool if you could automate the settlement of these call option incentives, maximize the profit with algorithmic purchase orders, and maybe even define strategies of how to use these profits, all with a click of a button? You’re in luck! twPro will be coming quite soon after Tapioca as the ecosystem's first sub-protocol, with a whole lot more functionality than that, maybe even including revolutionizing incentives for other protocols as a service? Remember, the jefe keeps his cards close to his chest.

But why options? Despite the UX issue, the answer lies in the fact that you enable the protocol to get the most granular control possible of any incentive vehicle, which is needed to minimize the impact of economic growth stimuli, and to create sustainability. You can of course control the amount of options and who gets them- which while important and often overlooked, is the same controls found with liquidity mining. However, you also can finely control the discount level, and enact an expiration- which further enables mitigation of the impact of the incentive cost. You also can create POL through the option being redeemed- being a non-zero cost to incentive recipients, which creating POL is the primary destination of Tapioca’s economic model.

Back to the future- because options are a market discounted sale of a token, they are also commonly compared to a bond, which was popularized by Olympus Pro. Bonds are essentially non-expiring options that don’t have a strike price, and could simply be described as an inverse Dutch auction of governance tokens as an incentive. So why are options better than bonds you may ask, dear reader? Well I’m glad you did- options create a natural price floor as the lowest strike price = the price floor. A bond is only a discount to the market price, no floor- no matter the market price, you get the same profit based on the discount. Secondarily, the option expiration is critical, as a call option on ETH @ $1000 strike price may not be a huge profit right now, but will be a massive profit in a year. Lastly, bonds carry no allocative efficiency, as regardless of the value you bring to the protocol, you will have the same access to the same bonding rates, which is why bonds generally incentivized front running bots over real users, and is why PoolTogether noted their bonds impacted their tokens price even more than liquidity mining.

However, allocative efficiency is of extreme importance- the final piece of the puzzle, as pertaining to DeFi economics, wherein the incentive distribution is autonomously and constantly perfectly aligned with user preference to perpetually remain in a growth state at the minimal cost possible. Therefore, while DeFi is in its 11th hour due to the grave wounds inflicted by our departed soul, the time has come to be introduced to thee guiding force, the very conductor of the incentive dilemma’s answer, the driver- twAML.

Violence is the raging storm that surges through the heart of Hell, where the souls of the merciless are caught in a perpetual tempest of their own creation, forever lashed by the very forces they unleashed upon the world.


Never before have we been able to allow the free market to decide by consensus what the monetary incentive needs to be in order to continue economic growth until now. twAML, or Time Weighted Average Magnitude Lock, is a DeFi monetary policy agent which firstly acts as a democratically governed measuring stick. This measuring stick prices the incentive amount by controlling the discount level, the driver.

As laid out, the vehicle, call options / oTAP, has been explained in enough detail, but as briefly mentioned, Tapioca’s destination is two fold. The first is to amass escrowed lent liquidity in its lending markets, which incentivizes users to mint USDO, lend it, and lock it, and attracts borrowers to utilize that supplied liquidity- remember, liquidity begets liquidity. The second destination is capturing POL. Even though Tapioca is generating expenses on its incentives, it is simultaneously creating a substantial amount of fees that will magnify with more and more locks, while also snowballing POL that will grow and grow in value from asset appreciation and utilization- primarily as stablecoin AMM LP in the beginning. However, the use cases of the POL will grow rapidly, as once you control the water in the ocean, all ships must sail through our waters, a black hole of the only real value.

The driver, AML (not anti-money laundering god damnit), controls the discount level of the call option incentives via free market consensus of the Tapioca economy. Users propose locks with differing lock durations and amounts of capital, which are weighed against the average locks, at that time. The AML is dynamic- users steer it to ensure it constantly remains at the optimal point to continue sustaining growth. If locks decrease, the AML decays, enabling users to receive a higher discount for shorter lock durations. If locks are increasing, the AML increases, which requires longer lock durations for larger discount levels. This is how Tapioca reaches allocative efficiency, through the free market determining the value of time + liquidity.

The second component to this is unit economics. Let’s say there’s many user’s locking their lent liquidity for longer and longer periods of time to obtain the eligibility to receive oTAP incentives every epoch. The reward then needs to decrease to find the optimal yield for the market and economic state of the protocol to continue system growth (more liquidity, locked longer). This also means the protocol cost to continue growth is always in an optimal state, if you overpay in incentives- you’re directly negatively impacting token value and sustainability of continued economic growth.

There also is a situation where the system could be underpaying. Less and less user’s locking their lent liquidity for shorter and shorter periods of time. Thus, the reward needs to increase, again, to find the optimal yield for the market and the economic state of the protocol to promote system growth (again, more liquidity, locked longer). To truly make a sustainable incentive model, it must minimize the consequences of economic growth, and amplify the benefits.

Thus, this is also why the discount level of oTAP ranges from a 50% max to 0%. Not all escrow arrangements are valuable to Tapioca. If Gray proposes a one week lock of 100 USDO, when the average is a one year lock of 1000 USDO, why should Gray receive any reward at all, when Tapioca can extract more value from what the average user is willing to offer?

AML also purposefully introduces game theory. If a user speculates that in order to receive the max discount of 50% in the near future, that they would need to lock for several years, but currently they could receive the 50% discount by locking for a month, the user could decide to lock for six months instead, “locking in” that maximum discount every week for that six months, instead of locking for just the month to get the maximum discount and then needing to lock much much longer than six months to continue getting the maximum discount when the lock lapses. This is a variation of the Rubinstein Bargaining Model. User’s are bargaining with one another with complete information of all other users current moves, in a near infinite time horizon game through sequential and alternating offers to get the highest incentive output possible. The pure strategy of farming & dumping (yield farming) also no longer exists, as users who offer more loyalty to the system, measured in their escrow commitments, will receive far greater rewards. The liquidity locusts upon attempting to lock for the minimum time possible, will be greeted with near zero rewards. To get value, you must give value.

TAP as a token exists on an “exponential decay curve” whereby inflation is constantly decreasing, and any call options left unredeemed (from going OTM or just expiring) “roll over” to the following epoch (week), which continually extends the life span of the incentive supply well past it’s six year shelf life. Not to mention, time weighting TAP (locking) enables holders to receive a slice of the entire pie of fees from the Tapioca ecosystem, which also incentivize the float of the supply being reduced along with inflation reducing autonomously. TAP has a fixed supply, which once all TAP have been redeemed through call options, Tapioca will have captured enough POL that the liquidity itself becomes a magnet for even more liquidity. This all also serves to create reflexivity.

Having journeyed through the harrowing descent of all nine infernal realms, from the darkest abyss where Liquidity Mining met its somber end, alongside the deceivers who falsely prophesied the dawn of sound monetary policies, plunging us into our present desolation. We now stand on the precipice of an uncharted domain- here, once more, we gaze upon the celestial stars of divine wisdom, for the true flywheel of transformation has been set to motion.

**-twMatt **


Editor’s Note: Yes, this is way too fucking long- it’s a years work, best I could do. I couldn’t have done this without Rod, the Capy’s, all of my amazing Tapioca family members, and a lot of caffeine and nicotine. This one felt special, I hope you enjoyed it.

$$P.S. Yes there’s a missing level, #soon.$$