【Open Sickle Open Rug 18 - Understanding On-Chain Liquidity】
"The death of VC coins" is quickly becoming a consensus. The real problem is that the path of "VC financing-listing" in CEX no longer has the liquidity to take over. 15-20% of the total market liquidity has completely migrated to the chain, and the rest is on the way. The overflow of on-chain liquidity is the fundamental reason for the meme explosion in this cycle.
😂 Times have changed, and cutting on-chain instead of cutting CEX has become the norm. But besides sending me dozens of pump imitation deck every week, what else can you do?
At this point, you need to first understand on-chain liquidity.
(The picture shows the developers struggling to pull the market on a dry rocky beach)
🌊 What does on-chain liquidity look like?
The biggest difference between on-chain liquidity and centralized exchanges is that the liquidity model is mainly based on AMM rather than order books. AMM publicly displays the total liquidity of the current trading pair based on the total value locked (TVL) in the pool and has determined liquidity at each price point. Order books require matching buy and sell orders to trade, and liquidity mainly depends on market makers providing bid and ask quotes, which leads to liquidity being controlled by market makers.
The price and liquidity of order books are not directly related, and liquidity can be manipulated to induce or allow market fluctuations. This allows the order book model to create a high market value with a small amount of funds, making it capital efficient. However, in reality, it is a Ponzi structure similar to a mutual aid fund, similar to winning money in a casino but not being able to cash out (thin liquidity in the downward range).
For mainstream assets, the issues with the order book model are not significant because the trading demand is high. However, for long-tail assets on the chain, such as "土狗" and DeFi native tokens, market makers are not profitable, and AMM is the most effective and fair trading model for participants.
🚿 Who provides liquidity on-chain?
First, on-chain liquidity is provided in these forms:
- LP in DEX
- JLP/GLP
- Various on-chain robots
- Retail investors
The first two are actually the same thing: 1 can be the base pool injected by "土狗" developers, or it can be a strategy to play LP fees (such as @MeteoraAG's DLMM). 2 packages LP ownership and fee dividends into financial products sold to retail investors to bear impermanent loss 😅
In 3, it includes the so-called MEV giants, sniper attacks within pump, copycat robots, smart money robots that trigger copycat and backrun, Jupiter sniper, which are essentially pre-written strategies. Once money is placed in them, trades are initiated when the relevant conditions are triggered, similar to the certainty of liquidity in AMM. In centralized exchange scenarios, automated strategies dominate. Correspondingly, on-chain automated strategies or bots should have a higher proportion due to the lower entry barriers on-chain.
This part is easily misunderstood. Saying that bots have a higher proportion does not mean that there are fewer real users. On-chain liquidity, due to the advantages of AMM over order books mentioned above, has deterministic liquidity, which allows for many strategies that cannot occur in centralized scenarios, especially for low-liquidity assets.
Finally, retail investors, or manual traders, account for a relatively small proportion. Many of them may rely on information from 3, so many of them are followers of automated strategies.
🤷♂️ Why do people provide liquidity?
Of course, it's for profit and making money.
Income comes from strategies, and strategies are a relative concept. Lending, USDE arbitrage, JLP, etc., are systematic strategies. But from the perspective of the money used as liquidity, whether it is used to launch a "土狗" or to sniper fair launches and quickly sell out, it is also a strategy.
In other words, as long as the risk-return of the strategy is good enough and the capacity is large enough, there will definitely be people providing liquidity. The scale of the strategy will become larger and larger until it approaches the capacity boundary of the strategy, leading to a decrease in the risk-return ratio to a level surpassed by other strategies.
Therefore, do not believe that just because the number of "土狗" on Solana or the main chain has exploded, but only a few have "graduated," liquidity is being drained by a conspiracy group. It is very likely that the opposite is true, and the conspiracy group is making too much money and expanding. More and more funds are being sucked into the "土狗" pool, leading to an increase in the total scale of "土狗" on Solana or the main chain, and thus increasing liquidity.
If you find it hard to accept what I'm saying, go and look at the logic of ETHENA again.
👨🌾 How to harvest on-chain liquidity?
Wolves eat meat, dogs eat feces, to harvest, you need to find the most liquidity.
First, understand the liquidity model of your own situation:
- In what form is this liquidity provided?
- Provided by whom?
- Why provide it?
Many people make mistakes here and will involuntarily engage in wishful thinking, subjectively believing that the liquidity of a certain ecosystem/scene is sufficient (such as the previous Base "土狗"). It must be specific to your own exit liquidity path, knowing "who" is providing liquidity in "what way."
For example, I personally believe that the reason why many pump imitations will die is not because of poor operation or pure hype, such as Makenow. It is because the fundamental business of Pump comes only from maximizing the trading volume on the Bonding Curve, and various robot strategies on the Bonding Curve are currently centered around Pump.
If you are a Pump imitation, you cannot share the robot liquidity on Pump, but you need to start from scratch to find robots and liquidity for your own bonding curve stage. Makenow has already started to have robot support, but it failed due to the Twitter API.
This is completely different from directly launching on a Dex because whether it's Meteora or Radyium, no matter what you launch, the robots and corresponding liquidity, such as sniping robots and others, are shared, which is completely different from the Bonding Curve.
Finally, you must understand why people provide liquidity (considering buy orders as liquidity provision), because your liquidity model provides a risk-return ratio that matches the preferences of a certain type of liquidity provider. As long as this is the case, all you need to do is write a good DOC to facilitate the connection with these liquidity providers. If this doesn't make sense, adjust the model. I won't continue to elaborate on this because it conflicts with my interests.
Conclusion
Compared to the previous CEX scene, the on-chain scene is still relatively untapped. Don't have preconceived notions, as this will impair your efficiency in seeing through the essence from first principles. When you see someone making money on-chain, don't immediately curse them for opening a rug, as this won't make you earn an extra penny. Think carefully, maybe they have seen something more fundamental than you have.
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