Many of us in the LeoFinance community have been discussing the RUNE cryptocurrency. Thorchain (RUNE) has an amazing community and massive potential to change the crypto landscape from the ground up. Many in the RUNE community have been talking about "Liquidity Black Hole Theory" today.
I feel like it's been a while since I sat down and just wrote a long-form post about something on my mind. As I've been working on the WLEO launch and releasing the Geyser distribution ecosystem for the WLEO-ETH pool, liquidity and DeFi more broadly have been at the forefront of my mind.
Today I came across a few of these tweets talking about Liquidity Black Hole Theory and the fascinating part about it is not only how it applies to RUNE (something that I'm invested in) but also how it applies to WLEO/LeoFinance (something that I care deeply about).
Liquidity Black Hole Theory Explained
AMM stands for automated market maker. AMM is one of the fundamental ways in which DEXs like BEPswap, Uniswap, Balancer and others operate. It's a protocol that allows investors to deposit liquidity in the form of the swappable currencies (in our case, WLEO and ETH) and earn a % of fees as traders swap in and out of the two currencies.
The problem with AMMs - and every exchange, really - is the time tested chicken and egg riddle. You start out with 0 liquidity and 0 trading volumes.
Without high liquidity, you will struggle to have high trading volume.
Without high trading volume, you will struggle to have high liquidity.
How Does a New Exchange/AMM Protocol Solve This Problem?
Answer: Liquidity Mining.
How Liquidity Mining Kicks Off the Network Effect
Liquidity mining has been given several names. Many will recognize "Yield Farming" as a term in the crypto space. Some negative connotations come along with that term, so lets stick with the liquidity mining term - which, in my opinion is more accurate when describing something like RUNE or WLEO.
With WLEO, we've created a sustainable model that distributes LEO/WLEO from our daily rewards pool to liquidity providers.
Investors who hodl LEO/WLEO are able to deposit WLEO + ETH liquidity into our Uniswap pool.
When a pool or exchange starts like this, there is no reason for investors to deposit liquidity. As we said before, this is a chicken and egg problem.
Listing WLEO on Uniswap and letting users jump in on their own won't get you very far. When the pool first starts, there is no trading volume and no liquidity. Again - without the liquidity, the trading volume will not come. Without the trading volume, the liquidity will not come.
If that's true, then how did we manage to get $350,000 USD into our Uniswap pool in the first 48 hours?
Outside of having the most loyal and amazing community ever (which we have), liquidity mining plays a central role in this early liquidity.
The liquidity mining rewards incentivize users to buy LEO/WLEO, match it with ETH and provide liquidity to the Uniswap pool.
We amplified this effect by turning our liquidity mining system into a geyser model: which means that the earlier you provide liquidity and the longer you provide liquidity for, the higher your liquidity mining rewards.
Liquidity Feedback Loops
As early liquidity is incentivized, the trading volume increases naturally as new/existing investors want more WLEO or ETH to establish their position in the liquidity pool.
This trading volume increases market maker profits (% rewards earned as fees) which then also contributes to the capital that is being provided as liquidity (since it has a greater incentive).
This increased liquidity decreases the spread (also referred to as slippage). As the spread tightens, traders have an easier time doing larger and more frequent trades in and out of the pool.
So the cycle repeats.
Where Does WLEO / LeoFinance Go From Here?
I've been seeing a ton of posts lately asking where LeoFinance and the WLEO token go from here. The goal of WLEO is not to simply set up a liquidity pool and then coast along as if nothing's changed.
As liquidity mining incentives are distributed and discussed in the broader space, new investors are attracted to the yield. As this attraction increases, these investors are incentivized to join the WLEO-ETH pool. Not only for the mining incentives but also for the trading fees because the volume and initial liquidity are established.
The virtuous cycle stems far beyond initial liquidity.
For a project like LeoFinance liquidity is essential. Without liquidity, new users and existing investors wouldn't be able to seamlessly buy and sell LEO/WLEO.
Without this seamless process in place, your scope and scale are limited to a great deal.
I put out a tweet from the LeoFinance account earlier today and discussed the vast difference in potential that is offered to us from Uniswap versus Hive Engine.
On Hive Engine, the total trading volume per day is on the order of $7k USD.
The trading volume on Uniswap averages in the hundreds of millions of USD per day.
Our WLEO-ETH pool did $42,000 USD in trading volume over the past 24 hours. That's more than 6x the entire trading volume on Hive-Engine for all tokens combined.
Also consider that LEO is consistently the top #1 or #2 token (usually only rivaled by DEC) in terms of daily volume. We typically contribute more than 30% of the total daily trade volume on Hive's second layer.
Many have discussed this before: LEO had reached the ceiling of potential that Hive-Engine offered. The volume and liquidity haven't been growing. The best way to improve that situation is to branch out.
We set our sights on Uniswap and have made our intentions clear. As WLEO is kickstarted with all of the liquidity that we've seen thusfar and all of the liquidity that I know is on the way in the coming weeks, we're going to take the project to new heights.
Liquidity Black Hole Theory offers an insight into how a token like LEO/WLEO can increase 20x over night. It offers insight into how our pool can go from $0 to $350k in 48 hours and most importantly, it offers a perspective on what is possible as we take WLEO to new DEXes, CEXes and DeFi protocols.
WLEO is an ERC20 equivalent of LEO and it opens up the doors to an endless sea of opportunity.
So to answer that original question: "Where is LeoFinance & WLEO Going?"
The moon.
We're achieving our goal of becoming a cross-blockchain ecosystem. A hardcore community of hodlers, investors and content creators. People who work together on a common mission to grow our ranks and continue to onboard new users who are as passionate about finance & crypto as we are.
LeoFinance currently sits at a $1.1M market cap. Our potential as a project has only just begun as we continue to develop the core pillars: Community, LeoFinance.io UI, Liquidity, WLEO, LeoApps..
Throughout the rest of this month, we're releasing V2 P2 of the LeoFinance.io UI which brings a set of essential features to the community.
In December, we'll release an updated month-to-month roadmap which will also unveil our latest project: micro blogging on Hive. Many community members have heard whisperings about this project, but none of them are prepared for the integration itself. Get ready to change the face of web3 🦁