Value Evaluation of DeFi Dual Currency Model

Author: shaneson.eth, Source: Author Twitter @k63jpx

For the DeFi dual-currency model (bill token + governance token), it may be assumed that the protocol’s sustainable profit S0 and the funds behind the market maker are limited (S1), which can be understood as the long funds of the project.

If a project is extremely dependent on the depth of its issued note assets, it needs a large amount of long funds S2 to build liquidity in order to be able to operate.

Then the sustainable funds used for token dividends are only S0 – S2.

**If S0 < S2, it is necessary to subsidize the funds of S1 to lease liquidity. **

**If S0 > S2, the protocol can only accumulate funds for pulling governance tokens. **

This is very dependent on the depth of the market maker's market-making capital S1, and there are very few powerful market makers in this circle.

If it is because of the distribution of chips, market makers are even more reluctant to pull orders.

This is a helpless problem of the Defi dual currency model, and it is also a problem that secondary investors need to think about.

**The funds invested by a team/market maker are always limited. The key reason why uni V3 is easy to explode thousands of times / ten thousand times the local dog project is because the algorithm of V3 allows the project party to control the price with a very low liquidity cost. ** Although the local price strategy will cause V3 to lose the pricing power of the global price range, for some project parties, they just want to concentrate all their funds on market promotion instead of building liquidity.

Behind this kind of concentrated power to pull the market to create a sudden wealth effect, it is worth thinking about that there are some good projects that require many project parties to spend a lot of agreement profits and market maker costs to maintain liquidity. This is certainly a good thing for crypto, but for secondary investors, they are prone to fall into the painful situation of "the project is good, but the currency price does not rise".

**The key problem encountered by Defi's dual-currency model is: there is only so much money, whether you use it to pull the market or build liquidity depth, relying on retail LPs is definitely unreliable. The funds of retail investors are not loyal enough, unless PCL is used to fully control LP with contracts. **I think this is something for all project parties to think about. **Maintaining the depth of liquidity is responsible for the project, and maintaining the trend of governance tokens is responsible for secondary investors. **

Of course, I am well aware. The price P of the governance token is positively correlated with the sustainable profit S0; the liquidity depth R of the bill is positively correlated with the sustainable profit S0; therefore, the project party should make an account: S0 = y(P , R, S1), the whole problem can be transformed into: input the lowest market maker cost S1, an optimization problem of maximizing S0, quite interesting.