How Mitosis Improves Liquidity Efficiency in DeFi

Liquidity Inefficiency in Traditional Decentralised Finance (DeFi)…

Liquidity is the cornerstone of DeFi as it enables transactions, facilitates price discovery, and supports the overall stability and functionality of DeFi protocols. In traditional DeFi landscape, protocols relied heavily on incentive programs to attract liquidity providers (LPs) by incentivising them with native tokens.

While incentive programs are effective in the short-term to bootstrap liquidity and boost total valued locked (TVL), it has proven to be ineffective and unsustainable in the longer term. Aggressive incentive programs often associate with extreme short-term yield to LPs which leads to high native token emission. As short-term yield and/or price of native token reduces over time, LPs withdraw their liquidity to other protocols with better incentive programs, rinse and repeat. A chicken-and-egg situation is now present for protocols as liquidity and functionality & attractiveness of applications depend on each other.

Introducing DeFi 2.0 – Protocol-owned Liquidity (POL)…

POL is a model where protocols acquire their own liquidity from the market or rent it from other protocols, rather than relying on unsustainable incentive programs to attract LPs. Besides reducing the need of constant high native token emission to rewards LPs, this model also encourages treasury growth whereby fees from owned/rented liquidity pools could enable long-term sustainability.

Mitosis Matrix Complements POL…

Matrix is a Mitosis Liquidity Framework which enables users lock assets into time-bound liquidity campaigns for a set period to earn higher yields. For instance, protocols with a POL model could design a liquidity program on Matrix for a set period in exchange for higher yields. As Vanilla Assets on Matrix are locked for set period, volatility of TVL can also be reduced. This increases the attractiveness of the protocol eventually breaking the chicken-and-egg situation and creates a win-win-win situation for protocols, users and investors.

Towards Multichain DeFi Future...

Mitosis can increase liquidity efficiency not just on a single chain but every chain by leveraging on Hyperlane’s permissionless interoperability feature. Mitosis and Hyperlane will shape the multichain DeFi future, bringing liquidity to anyone and anywhere on chain.

References:

1) Mitosis Litepaper "Mitosis: Network for Programmable Liquidity": https://docs.mitosis.org/assets/files/mitosis-litepaper-6e8de95ce2bb14f8c2d2ffc8c272b9f3.pdf

2) Jake's Article "Mitosis Thesis + Call-to-Action": https://x.com/Jake_on_me/status/1880294253479518463

3) Jake's podcast with Chjango Unchained "DeFi Yield Secrets the Pros Don't Want You to Know About | Mitosis": https://www.youtube.com/watch?v=a4_Ul4WwoZc&t=98s