Concept of DeFi yield farming? Andre Cronje explains Liquidity Mining Rewards v2: Combining with options

Yearn founder Andre Cronje introduced a new liquidity mining reward inspired by pods.finance, a structure that combines options.

The Origin of Liquidity Mining

"Liquidity mining, rewards, incentives, call it what you will, is an inherent part of cryptocurrencies," said Andre Cronje, pointing out that even Proof of Work (PoW) provides rewards.

He mentioned that, to his knowledge, the first liquidity mining was in Synthetix's sETH/ETH pool, where liquidity providers could earn SNX. This classic StakingRewards contract was initially developed in collaboration with Anton Bukov, co-founder of aggregator 1inch, and has since become the foundation of liquidity mining as we know it today.

Issues with Liquidity Mining V1

Andre Cronje pointed out that as liquidity mining flourished, its flaws started to show, mainly in two aspects:

• Low liquidity loyalty
• Low token loyalty, opportunistic selling

He mentioned that when the reward mechanism stops, liquidity quickly disappears. The aggressive liquidity reward settings sometimes harm the token price, although it depends on the token's economic design and purpose. However, in the eyes of the public, if the token price drops, the project is considered a scam.

The Crux: Getting Something for Nothing

Andre Cronje believes the core issue is "getting something for nothing." If you always get something for nothing, you will only seek more profit.

He used Curve as an example. If you provide liquidity in a three-coin pool like DAI/USDC/USDT and earn CRV rewards, for opportunistic liquidity providers with low loyalty, they only care about getting CRV and selling it for more DAI/USDC/USDT. They simply provide liquidity to earn rewards.

Understanding Options Simply

Before delving into Liquidity Mining Rewards V2, Andre Cronje briefly explained the concept of options:

There are two types of options: call options, the right to buy, and put options, the right to sell. You can think of call options as market buys and put options as market sells. Taking CRV as an example, when the CRV market price is 2, if the call option's strike price is 2, you can buy CRV for 2, and vice versa. Liquidity Mining Rewards V2 will focus on call options.

Options have three basic properties:

• What is the underlying asset? For example, CRV
• What is the strike price? How much to pay?
• What is the expiration date? For example, a specific time in the future

Liquidity Mining + Options: Still Profitable and Preventing Dumping

Andre Cronje stated that in the example of Curve mentioned earlier, if you provide liquidity and claim CRV as a reward, it can be seen as a call option with a strike price of "0" and an expiration date of "now."

He believes that viewing liquidity mining as a call option will make the project stronger.

If a project can:

• Strike price = Current Spot -50%
• Expiration date = Current + 1 month

He explained that if you mine 1000 CRV, you would receive a call option to buy 1000 CRV for $1000. Opportunistic liquidity providers still have an incentive to do this because they can still earn $1000. Calculation: CRV market price is 2, 1000 CRV is worth 2000, and you get a call option to buy 1000 CRV for $1000.

For the protocol, the $1000 call option income paid by liquidity miners can be distributed to veCRV holders, or allocated to foundations, treasury DAOs, or even used for market-making.

With the expiration date set, it's possible that a month later, if the CRV price is $1, those who want to claim mining rewards to sell for profit would have no incentive to exercise the call option because it would be unprofitable. This design further establishes a price floor for liquidity mining rewards.

Andre Cronje: Interested in Trying It Out? The Code Is Here

Andre Cronje mentioned that such a design could be achieved with some modifications to the StakingRewards contract.

He believes it would bring the following benefits:

• Reduced opportunistic liquidity providers
• Decreased selling pressure
• Natural price floor
• Additional fee income for DAO/token holders

He also provided the code.