Within an hour, the market value reaches over a hundred million US dollars as IUL in the DeFi world attempts to challenge the exchange's IEO model.

The DeFi project UMA conducted an Initial Uniswap Listing (IUL) through the decentralized exchange Uniswap, and within one hour, UMA's total market capitalization reached $130 million. Is there a chance for the decentralized exchange IUL method to replace the existing exchange IEO model?

Original Title: "DeFi Review: Will IUL Become the New Trend and Replace IEO?"
Author: Cao Yin, Managing Director of Digital Renaissance Foundation

DeFi introduces a new trend. At 1:00 AM on April 30, the DeFi project UMA conducted an IUL (Initial Uniswap Listing) on the decentralized exchange Uniswap. UMA, a prominent DeFi project in the U.S., previously received investments from Placeholder and Dragonfly. It is currently developing a DeFi synthetic asset contract platform that does not require oracles. However, the focus of this review is on IUL, and more analysis about UMA itself will be introduced later together with Laminar.

The steps for IUL are straightforward, requiring only two steps. Taking UMA as an example, the specific steps for the Uniswap IUL are as follows:

The following steps are simulated later, and the amounts may not correspond to the actual UMA operations.

Establish a liquidity pool for UMA tokens on Uniswap.

Deposit 2 million UMA tokens and 2550 ETH into the created UMA liquidity pool. With the issuance preparations completed, trading can begin immediately!

Uniswap utilizes the constant product market-making method, where the product of token quantities in the liquidity pool remains constant, X*Y=K. By depositing the initial liquidity tokens for UMA, an initial price for UMA issuance is set as well, 2,000,000*2550= 5,100,000,000. Based on the price of ETH at that time, it can be determined that the initial issuance price for one UMA token is 0.001275 ETH (or 0.2675 USD at the time).

Moreover, this price serves as the floor price for UMA's issuance, meaning as long as no UMA tokens other than the initial 2 million are added to the Uniswap liquidity pool, the price of UMA on Uniswap will never drop below 0.001275 ETH. According to UMA disclosures, this price was also the investment price for angel investors like Dragonfly and Placeholder.

UMA's IUL corresponding price, Source: The Block

Prior to the issuance, UMA announced the distribution plan for future tokens, with a total of 100 million tokens allocated as follows:

• 48.5 million UMA (48.5%, Team, Angel Investors: Locked)
• 35 million UMA (35%, Ecosystem Developers, Users: Unissued)
• 14.5 million UMA (14.5%, Future Token Sales: Unissued)
• 2 million UMA (2%, Uniswap Issuance)

It can be observed that the 2 million UMA tokens issued in this round will be the only circulating UMA tokens in the market for the time being. According to Uniswap's constant product market-making mechanism, whenever someone buys UMA, the price of UMA naturally rises along the constant product curve. This means that purchasing UMA at the floor price on Uniswap guarantees a profitable transaction without loss.

Price trend of UMA on Uniswap, Source: Dune Analytics

As expected, FOMO immediately ensued on Uniswap after UMA went live. UMA was priced at $0.2675 at 5:00 PM EST, and by 5:08 PM, the price had surged to $2.183. Subsequently, a sell-off occurred, causing the price to drop to $1.247 by 5:18 PM, followed by a new round of Pump & Dump, albeit with reduced volatility.

As of the time of writing, the price has stabilized above $1.3 for 24 consecutive hours, with UMA's total market value reaching $130 million, indicating a reasonable market valuation for UMA. The IUL provided a market benchmark price for the sale of the 14.5 million UMA tokens in the future. Many projects have worked tirelessly to increase their market value from millions to billions, but UMA achieved this within an hour and also managed to raise a significant amount of funds.

Balance in UMA liquidity pool on Uniswap, Source: Uniswap

Currently, the ETH balance in the Uniswap liquidity pool is approximately 5808, while the UMA balance is around 900,000. Compared to the initial issuance of ETH and UMA, there has been an increase of 3358 ETH and a decrease of nearly 1.1 million UMA tokens. This means that in this issuance, investors purchased 110,000 UMA tokens with 3358 ETH.

UMA has not yet provided a solution for withdrawing the raised ETH from the liquidity pool, but there are several options available. For instance, UMA can sell its liquidity pool shares, use them as collateral on other DeFi platforms to borrow other assets, or completely remove the liquidity, retrieving all ETH and UMA from the pool at once. However, considering the current total liquidity of UMA, this action would essentially delist UMA from Uniswap, which UMA is unlikely to pursue for cashing out.

The outcome of this issuance was unexpected yet logical. While UMA had announced its IUL preparation a week ago, the DeFi community did not pay it much attention until the day of issuance. The final result surprised many but was fairly reasonable. Upon reflection, there are still several issues that need addressing:

• Centralization Risk: a. If the project team is the sole market maker, they can remove liquidity at any time and reset the constant product to manipulate prices. b. The UMA team adjusted the issuance time shortly before the original schedule and did not go live at the new time, allowing the team to potentially exploit the time difference for arbitrage.
• User Experience: Many professional players utilized scripts to take advantage, leaving non-professional participants as bag holders and resulting in a concentration of tokens in the hands of professional players, hindering token distribution and community development.
• Pricing Risk: UMA did not conduct market pricing before issuance. Although the issuance price was based on angel round valuation, it did not reflect the true market valuation. This resulted in a higher issuance premium, akin to the project underselling some tokens. While beneficial to investors, it is not a mature issuance method.
• Disclosure Risk: UMA did not proactively disclose the issuance details in the media before the issuance. The limited number of auction participants affected the market efficiency of UMA valuation, and the lack of participants also impacted the purpose of establishing a token holder community through this IUL.
• No Provision of UMA's Tokenomics Model: Since UMA's product was not yet live during issuance, the specific details of UMA token usage remain unknown, hindering investors' valuation analysis of UMA.

Despite these issues, evaluating the issuance based on fundraising scale, increased valuation, price discovery, community initiation, and marketing, this IUL issuance was undoubtedly successful. I believe that this IUL method on decentralized exchanges will completely replace the existing IEO model on exchanges.

Currently, the primary purpose of projects in exchange IEOs is not fundraising. Exchanges typically require projects to use the majority of IEO funds for market-making within the exchange to maintain prices. Moreover, all major exchanges have strict market value management requirements for IEO projects, requiring projects to deposit a sum as collateral in case of price breaches, where the exchange will use these funds to support the project if prices decline. Additionally, to attract retail investors to participate in IEOs, exchanges intentionally lower the issuance price, with many IEO prices even lower than early institutional investor prices. Therefore, projects release only a small portion of tokens in IEOs, generally below 5%.

The main objectives of projects in exchange IEOs currently include:

• Establishing an early token holder community through the exchange's vast user base
• Price discovery
• Increasing valuation
• Marketing

The IUL issuance on decentralized exchanges can provide all the functionalities of IEOs mentioned above. Furthermore, adopting the IUL method can avoid the various downsides of the current IEO model.

IEO Downsides: High costs, projects need to pay high IEO listing fees to exchanges
IUL Advantages: Zero cost, anyone can complete IUL issuance in two steps on Uniswap

IEO Downsides: Fake trading, some exchanges deliberately inflate IEO project trading volumes
IUL Advantages: All trades are on-chain, making it difficult to falsify transactions

IEO Downsides: Price manipulation, some exchanges intentionally dump tokens against the project
IUL Advantages: No exchange counterparty, direct trading between project and users

IEO Downsides: Account thresholds, users need to open accounts on exchanges to participate in IEOs
IUL Advantages: Participation in IUL only requires an on-chain address, no account creation or document submission needed

IEO Downsides: Custodial risk, projects and users need to custody raised and invested funds on exchanges
IUL Advantages: Assets are non-custodial, eliminating concerns of centralization risk

If the ROI of token investment is used as a measure of successful issuance, UMA's IUL has achieved an ROI of 4.9 times, with a maximum ROI of 8.16 times. This surpasses any IEO and should be noted that these IEO ROIs were achieved through heavy marketing expenditures by projects and exchanges, whereas UMA conducted minimal marketing before the IUL, with limited awareness and participation.

2020 Major Exchange IEO Returns

After referencing the UMA IUL and various IEO strategies on centralized exchanges, several optimizations can be made for future IULs:

1. Conduct market pricing before issuance to provide a reasonable valuation range.
2. Reserve a certain amount of tokens externally and do not place all issued tokens into the liquidity pool. Publicly declare that if the price exceeds the upper valuation limit, the team will sell a portion of the tokens to keep the issuance price within the valuation range. This aims to prevent price volatility due to FOMO and prevent whales or professional players from acquiring too many tokens at once.
3. Utilize DAO + smart contracts to manage addresses holding liquidity pool shares to prevent the project team from suddenly withdrawing all liquidity funds and resetting the constant product to manipulate market prices.
4. Initiate IUL via smart contracts to ensure precise and public issuance times, preventing the project team from exploiting time discrepancies and ensuring fairness.
5. Launch IUL on Balancer, where projects can deposit assets other than ETH as liquidity assets, enabling them to break the asset size ceiling and expand issuance scale. (Currently, Balancer's liquidity pool creation function is not yet available)

Even without these optimizations, UMA's simplest IUL method has proven effective. Aside from UMA's team capabilities, the open issuance and price discovery mechanisms of IUL are the primary reasons for its success. It is foreseeable that many projects will emulate UMA for IULs, and with the maturation of the IUL approach, exchange IEOs are likely to be replaced by IULs, a trend worth following.

Easter Egg: CAOYIN Token Initial Uniswap Listing

YIN Token is a Social Money issued in collaboration with the community currency issuance platform Roll (Roll introduction: New Trend: Community Currency Issuance Platform Roll, Where Creators Can Potentially Make a Living)

• YIN Usage: Currently used for inviting me to dinner, more functions in development
• Contract Address: 0x8a4ee36b7ac021ea1ac780858da54b0711ae0d13
• Total Supply: 10,000,000 YIN
• Issuance: 600,000 YIN
• Liquidity Pool Recharge: 2 ETH + 400,000 YIN
• Market Management Funds: 1 ETH + 200,000 YIN
• Issuance Exchange Rate: 1 ETH = 200,000 YIN
• YIN Total Market Value: 50 ETH
• Issuance Platform: Uniswap
• Issuance Time: May-03-2020 12:28:03 PM +UTC

Redemption Guide:

Open Uniswap.

In the "Select Token" field in the "Output" column, enter the YIN Token contract address: 0x8a4ee36b7ac021ea1ac780858da54b0711ae0d13

In the "Input" column, select the token you wish to exchange for, such as ETH, USDC, DAI, MKR, enter the quantity you wish to pay, and click exchange.

This article is authorized by ChainNews for reposting. Article Source: ChainNews (ID: chainnewscom)

Further Reading

• Creating Dai with Bitcoin! MakerDAO Announces WBTC as a New Collateral Option
• Cross-Domain Expansion! Data Provider skew. Secures $5 Million in Funding, Launches Compliance Trading Platform
• Cao Yin: Economic Crisis Under the Epidemic Could Be a Critical Opportunity for DeFi to Rise
• Cao Yin: How Should Maker Adjust Monetary and Fiscal Policies in the Liquidity Crisis?

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