The inception of "liquidity mining" can be traced back to June 2020 when Compound launched its "lending to mine" model, which significantly popularized DeFi. This mechanism, while enabling projects to bootstrap their ecosystems, also led to substantial market bubbles and a widespread reevaluation of project valuations. Many leading DeFi tokens experienced price drops of up to 90% from their all-time highs.
Despite the current crypto bear market, the DeFi sector has expanded massively compared to two years ago. According to Defi Llama, as of May 31, 2022, the total value locked (TVL) in DeFi applications reached $128.65 billion—a staggering 116-fold increase from the $1.1 billion recorded on May 31, 2020. However, this represents a 53.7% decline from the peak of $277.98 billion on December 3, 2021. Over this period, leading DeFi projects have not only built strong brand moats but have also continuously innovated, releasing upgraded versions to offer better products.
Today, liquidity mining has matured into a more rational practice. This article reviews ten early DeFi projects to assess their current status after the initial hype subsided.
Uniswap: Maintaining Dominance Through Innovation
Launched in November 2018, Uniswap has consistently reinforced its leading position through innovation. Starting with Uniswap V1, which only allowed ERC20/ETH trading pairs, it evolved to V2, enabling any ERC20 token pair, and now V3, which introduces concentrated liquidity and customizable fee tiers.
In May 2022, Uniswap’s trading volume was approximately $62.6 billion, a 220-fold increase from May 2020's $284 million, though down 26.1% from the peak of $84.7 billion in May 2021. As of May 31, 2022, its liquidity stood at $5.97 billion, a 43.1% decrease from the December 2021 high of $10.5 billion.
The V3 upgrade boosted Uniswap’s market share to 74%. Previously, most DEXs charged a default 0.3% fee, while centralized exchanges like Binance offered rates below 0.1%, putting DEXs at a disadvantage. Uniswap V3’s concentrated liquidity feature allows traders to enjoy lower fees, and LPs to achieve higher capital efficiency and returns.
For instance, on June 2, the USDC/ETH pool with a 0.05% fee tier had lower liquidity than the 0.3% tier but processed nine times more volume over the previous week, resulting in higher fee earnings for LPs.
SushiSwap: Struggling to Differentiate
SushiSwap launched in late August 2020 as an early fork of Uniswap, attempting a "vampire attack" by incentivizing users to migrate liquidity from Uniswap by offering high APRs, sometimes exceeding 1000%. However, after Uniswap introduced its own token, SushiSwap lost its edge.
Despite expanding to over ten chains and adding features like Kashi (lending) and Miso (IDO platform), SushiSwap lacks a core competitive advantage. Leadership instability has also been an issue—founder Chef Nomi transferred control in September 2020, and anonymous leader 0xMaki left in September 2021.
Defi Llama data shows Sushi’s liquidity at $2.07 billion, down 70.6% from the November 2021 high of $7.04 billion. Trading volume in May 2022 was $3.93 billion, an 84.4% drop from the May 2021 peak of $25.2 billion.
Curve: Leading Stablecoin Swaps and Evolving
Launched in January 2020, Curve dominates the stablecoin swap market. The "Curve Wars" emerged due to competition from Convex and the rise of algorithmic stablecoins, where participants buy and stake CRV to influence emissions and attract liquidity for their preferred stablecoins.
Uniswap V3 now competes with Curve’s stablecoin market via its 0.01% fee tier, while Curve innovates in cross-asset trading. For example, its collaboration with Synthetix enables cross-asset swaps like DAI to WBTC via synthetic assets. However, limited liquidity in synthetic assets like sUSD restricts large trades.
Curve’s tricrypto2 pool, with over $470 million in liquidity evenly distributed among USDT, WBTC, and WETH, offers low-fee, low-slippage trading for the top three cryptocurrencies at a 0.069% fee.
Curve’s total liquidity across all chains is $8.93 billion, down 63.3% from the January 2022 high of $24.3 billion but up 700-fold from $12.75 million two years ago.
Bancor: Pioneer Adapting to New Challenges
Bancor, whose whitepaper was published in February 2017, invented the liquidity pool concept and created one of the first AMM DEXs. From V2 onwards, it supported single-sided liquidity and impermanent loss protection.
Bancor’s initial vision was to provide liquidity for long-tail assets paired with its native BNT token. However, this model, similar to Uniswap V1, became inefficient as all trades had to route through BNT.
Bancor 3, launched in May 2022, introduced an Omnipool architecture that consolidates all liquidity into a single vault, reducing gas costs and improving efficiency. Trades now follow optimal paths without mandatory BNT involvement. Bancor’s current liquidity is $620 million, down 74.4% from the May 2021 high of $2.42 billion.
Synthetix: Synthetic Assets and Market Challenges
Synthetix evolved from the stablecoin project Havven and changed its monetary policy in February 2019. Yearn founder Andre Cronje credited Synthetix with inventing liquidity mining, though founder Kain cited inspiration from Livepeer and Fcoin.
Synthetix is a synthetic asset protocol where users mint synths like sUSD by overcollateralizing SNX. sUSD’s current supply is 98.7 million, up 12.1-fold from two years ago but down 70% from the August 2021 high of 329 million.
Yearn Finance: Yield Aggregation in a Competitive Market
Launched in July 2020, Yearn pioneered fair token distribution and yield aggregation. It pools user funds to participate in liquidity mining on protocols like Curve, taking a performance fee. Yearn’s locked CRV tokens provided higher yields than individual farming.
However, competitors like Convex and declining yields reduced its appeal. The DeFi "risk-free" rate—comprising Curve’s 3pool, Aave V2 USDC deposits, and Compound USDC deposits—has fallen to around 1%, shrinking Yearn’s market.
Yearn’s TVL is $1.19 billion, down 82.8% from the December 2021 high of $6.91 billion. With falling revenue and ongoing operational costs, Yearn has been operating at a loss since early 2022.
MakerDAO: Decentralized Stability and Growth
One of the earliest DeFi projects, MakerDAO initially launched single-collateral SAI (ETH-only) before transitioning to multi-collateral DAI in November 2019.
After the March 2020 market crash, MakerDAO expanded its supported collateral types. It now offers four DAI minting methods: overcollateralization, Peg Stability Module (PSM), real-world assets, and direct deposits. The PSM, accounting for nearly half of DAI supply, provides ample exit liquidity, making DAI increasingly similar to centralized stablecoins.
DAI, soft-pegged to $1, has maintained stability with minimal deviations. The 10% premium during the March 2020 crash led to collateral expansions and the PSM, preventing recurrences.
DAI is the largest decentralized stablecoin by market cap, with a supply of 6.76 billion—down 34.9% from the February 2022 high of 10.38 billion but up 51-fold from 129 million two years ago.
Aave: Leading Lending with Multi-Chain Expansion
Originally EthLend, Aave rebranded in 2018 and launched its liquidation mechanism in Q2 2019. The latest V3 update enhances cross-chain liquidity and capital efficiency, deployed on Polygon, Fantom, Avalanche, Arbitrum, Optimism, and Harmony.
However, most activity remains on Aave V2 on Ethereum, Avalanche, and Polygon. V3 deposits on all chains are under $100 million each. Total deposits across V2 are $12.56 billion, with borrows at $3.6 billion and TVL at $8.96 billion. Total deposits are down 60.2% from the October 2021 high of $31.59 billion but up 161-fold from two years ago.
Compound: Early Innovator Facing Challenges
Compound launched in September 2018 and sparked the liquidity mining trend with its COMP token in June 2020. However, it has struggled with innovation and multi-chain expansion, as Compound Chain remains unreleased, allowing Aave to pull ahead.
Operational issues include an November 2020 oracle failure due to a DAI price spike on Coinbase Pro, causing $80 million in liquidations, and a September 2021 bug incorrectly distributing 280,000 COMP (worth $80 million at the time).
Compound currently has $5.62 billion in deposits, $1.29 billion in borrows, and a TVL of $4.33 billion. Despite large market size, user activity is low—Dune Analytics data shows only 78 daily depositors and 24 borrowers on average over the past 30 days. Borrows are down 86.1% from the September 2021 peak of $9.31 billion.
dYdX: Derivatives Trading and Volume Declines
dYdX, founded in July 2017, offers decentralized perpetual contracts, margin trading, and lending. Its key product, cross-margin perpetuals on StarkEx (StarkWare), launched in February 2021.
Liquidity mining boosted trading volume and open interest, but declining DYDX token prices correlate with reduced activity. For example, the BTC/USD pair’s weekly volume was $1.77 billion from May 29 to June 4, 2022, down 89.8% from the $17.27 billion peak during February 13-19, 2022.
Key Takeaways and Future Outlook
Successful DeFi projects like Uniswap, MakerDAO, and Aave have built strong brand moats over years, protecting them from fork competition.
Continuous innovation—such as Uniswap and Curve’s core feature upgrades—enhances competitiveness. Multi-chain expansion is crucial for market growth.
Despite recent downturns, metrics like overall TVL, Uniswap’s monthly volume, and Aave’s deposits have grown hundredfold compared to two years ago, underscoring the sector’s long-term resilience.
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Frequently Asked Questions
What is liquidity mining?
Liquidity mining involves users providing liquidity to DeFi protocols in exchange for token rewards. It helps bootstrap liquidity but can lead to inflationary pressures and market bubbles if not sustained organically.
How has Uniswap V3 improved trading?
Uniswap V3 introduced concentrated liquidity, allowing LPs to specify price ranges for their funds. This increases capital efficiency, enables lower fees for traders, and potentially higher returns for LPs compared to previous versions.
Why did SushiSwap struggle after its initial success?
SushiSwap’s early vampire attack on Uniswap was initially successful, but it lacked sustained innovation and faced leadership instability. Without a unique value proposition, it couldn’t maintain momentum after Uniswap launched its token.
What is the Curve Wars?
The Curve Wars refer to competition among protocols to accumulate and stake CRV tokens to influence liquidity mining emissions on Curve. This allows them to direct rewards to their preferred pools, enhancing liquidity for their stablecoins or assets.
How does MakerDAO's Peg Stability Module work?
The PSM allows users to mint DAI using other stablecoins like USDC at a 1:1 ratio with minimal fees. It provides deep liquidity for DAI redemptions, helping maintain its peg and reducing volatility during market stress.
What challenges do yield aggregators like Yearn face?
Declining yields across DeFi due to market conditions and increased competition have reduced Yearn’s appeal. Additionally, operational costs and reliance on performance fees have led to financial strain during bear markets.