DeFi Perspective: Liquidity mining is like Uber's marketing strategy, where the "Stupid Money" in the market benefits both the protocol and users.

After the DeFi craze, the governance tokens of various major protocols have been criticized for their excessive issuance and lack of utility due to the large mining rewards. However, a finance professor from the University of Chicago compared this to the high subsidy marketing commonly used by Silicon Valley startups like Uber. In reality, the results brought by liquidity mining are a win-win for both the protocol and users, with the losers being the "Stupid Money" in the market.

Original link: https://anthonyleezhang.substack.com/p/yield-farming-as-growth-hacking?s=r

Liquidity mining in Web3 is essentially like Silicon Valley startups/Uber/MoviePass style high-subsidy growth hacking, but liquidity mining subsidizes through newly issued equity tokens instead of using venture capital funding to subsidize users.

Note: MoviePass was a popular movie ticket subscription service in 2011. After facing resistance from mainstream theaters like AMC, the original team has recently returned and resumed development.

It's like not you paying MoviePass $10 and getting to watch a $30 movie ticket, but you pay $30, and MoviePass gives you $20 in stock every month that you can freely trade. Therefore, the user's ultimate cost is still $10.

This is achievable in Web3 because tokenization mechanisms can issue things that look like equity—having governance and some tokens even appear to have cash flow functions, with issuance costs much lower than TradFi startups.

Imagine trying to apply tokens to MoviePass, you have to have your users sign a micro-contract to give them $20 in equity each month, which I think you are not allowed to do because your users might not be accredited investors, not legal advice.

Is this better than growth hacking subsidized by venture capital? Looking at it from the perspective of Modigliani-Miller theorem, the law of capital structure irrelevance, the two should be the same, whether in cash, equity, or popcorn discounts, $20 is $20.

Note: The Modigliani-Miller theorem argues that the value of a firm does not change due to different financing methods such as issuing stocks or bonds.

How does it look in reality? MoviePass sells a $30 movie for $10, which seems like a loss and foolish, but when MoviePass issues equity to subsidize, it doesn't seem like a loss, I think diluting equity to subsidize users is an advantage.

In some ways, the true challenge of successful liquidity mining operations is:

If everyone wants liquidity mining to work well, why would anyone hold equity that runs on a business model and would be quickly heavily diluted? Shouldn't everyone sell their equity rewards the moment they get them?

And if they do sell immediately, the equity will be worthless, which means the protocol must give out more equity to make the subsidy value reach $20, this will incentivize users to sell their equity, keeping the mechanism running.

So in some ways, the real challenge in liquidity mining operations is why the equity prices of certain protocols are kept so high, an obvious assumption being that everyone has overestimated the value of equity tokens fundamentally.

In conclusion, from the perspective of protocols, using liquidity mining as a growth hacking strategy is very clever, using equity as a subsidy mechanism is very low cost, for some reason, everyone is willing to hold your equity at high, almost foolish prices.

If everyone, even at foolishly high prices, wants your equity, giving them equity instead of cash is of course advantageous, allowing you to control the bubble in a relatively low-cost way and achieve mass adoption.

Is this beneficial? Or to be more precise, who wins and who loses? Theoretically:

User's win: Users who use the protocol but do not hold equity, as long as they sell before the equity is heavily diluted, can win by obtaining rewards from using the protocol.

Protocol itself/Venture capital win: The protocol gains more adoption, overall value increases, but it is also diluted by more equity issuance, like a balancing mechanism, if they dilute too much and the bubble bursts, then they lose.

Losers: If you also believe that liquidity mining works because tokens are systematically overvalued, then the situation is like any bubble, the losers will be those users who hold overvalued equity and support high-priced equity.

From this perspective, all factors make liquidity mining run effectively, giving tokens in liquidity mining is more feasible as a growth hacking technique than giving cash discounts because there will be some Stupid Money inflating token prices, and protocols giving tokens are cheaper than cash.

Finally, as with any similar event, Stupid Money loses, and of course, determining which funds are Stupid Money beforehand is not always so simple!