The Way Forward for Liquidity Pools

24 Aug 2022

The environment in which liquidity pools operate is very competitive, making the game of recruiting liquidity challenging when investors continuously seek high returns elsewhere and take liquidity with them.

According to the Nansen blockchain analytics platform, 42% of farmers who provide liquidity to a pool on launch day withdraw their funds within 24 hours. Seventy percent will be gone by the third day.

OlympusDAO has been experimenting with "protocol-specific liquidity" to address this problem, sometimes known as "mercenary capital." Instead of generating a pool of available funds, the protocol allows users to deposit their cryptocurrency into a discounted treasury in exchange for the system's token, OHM.

Users may guess on OHM and perhaps win large payouts.

Despite this, the model has run into the same problem as earlier models: investors who are only interested in selling their tokens and moving on to other options, which weakens trust in the protocol's ability to survive in the long run.

Unless DeFi discovers a solution, the transactional nature of liquidity will prevent meaningful changes to liquidity pools shortly.

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