Say NO To Crypto Hyperinflation & Illiquidity On BNB Smart Chain

We often see many good altcoin projects on the BNB Smart Chain fail not because of the lack of technical capabilities but due to insufficient liquidity in the market resulting in the collapse in coin price.

A coin is said to have high liquidity when it can be traded quickly and at a price close to its market value. A liquid market makes it easier for investors to enter and exit positions, provide a more accurate reflection of market conditions, and reduces investment risk. Thus, attracting more investors and traders to the market, leading to increased liquidity and stability.

Conversely, illiquidity is a market’s incapacity to absorb trades without significantly affecting the coin price. Especially in a bear economic situation, insufficient liquidity depth will lead to a downward death spiral of the coin price.

Altcoin projects typically set aside a large percentage of their coin supply to incentivize liquidity providers. This can negatively impact the sustainability of the project in these ways:

Significant sell pressure: Inflationary coin emission incentivizes short-term behaviour that increases sell pressure on the farmed coins. Mercenary liquidity providers often sell their rewards to recoup their investments. Current solutions, such as time-locked staking, do not solve the core issue and only serve to prolong liquidity attrition.

Goal misalignment between project and liquidity providers: Liquidity providers are incentivized by high reward rates rather than a strong belief in the project’s success. Hence, when the rewards are scaled back or exhausted, the liquidity providers will remove their capital and move on to the next opportunity.

Projects should own their liquidity

Projects should have ownership over their liquidity on the free market, also known as project-owned liquidity. Controlling the liquidity comes with various benefits not found in rented liquidity.

Project-owned liquidity means that the project will become the most significant stakeholder of the liquidity; this assures users that there is always adequate liquidity during normal market operations and volatile periods. Having the most prominent share gives users the confidence that the project is in alignment with long-term growth and not a temporary hype machine.

It also means that the project will be able to turn liquidity from a liability to a source of income, as the project will get to keep all trading fees earned from providing liquidity in the exchange markets.

Then there is no longer a need to throw incentivization rewards at liquidity providers, who will typically exit the project once the incentives are not attractive enough.

Bonding your Altcoin project

Inuko Finance, one of the leading DeFi DAO upstarts on the BNB Smart Chain, will soon launch a new bond marketplace to help altcoin projects grow.

Altcoin projects, both new and old, on the BNB Smart Chain can then participate and provide this bond facility to their communities, creating new competitive offerings.

A bond allows users to sell assets (i.e. Quote Token) in the bond market in return for Payout Tokens. A project can sell its native coin for assets or buy back its native coin with assets.

A project can control the circulating supply of its coins in the open market through bonds. During an up trend, a project can take the opportunity to liquidate coins in the bond market to stock up assets. While during a downtrend, a project can take the opportunity to reduce the circulating coin supply by buying back coins through the bond market with assets.

Bonds are discounted to incentivize users to buy from a bond rather than the exchange markets. These bonds also have a vesting period to prevent users from selling all the discounted tokens at once for a quick profit.

These discounted offerings sell through a continuous Dutch auction mechanism where bonds are priced dynamically, depending on the supply and demand of the bonds. It trends higher when there is more demand and lower in the absence of need.

This mechanism provides an accurate real-time reflection of the bond price in the market. Simultaneously, bonds become highly competitive products as bond participants compete in bidding for the most considerable discount. The project benefits from maximizing asset acquisition and providing its community with a great deal on its altcoin.

Conclusion

Incentivizing liquidity providers is a detrimental design in tokenomics, and the project should own its liquidity to have more control over its altcoin price.

Bonds provide altcoin projects with a means to grow the project-owned liquidity, which helps them achieve market depth and pricing stability. Communities of altcoin project running bonds also get to benefit from discounted offerings.

Incentivizing liquidity providers will become a thing of the past, and bonds will soon be the new norm for mastering tokenomics for altcoin projects on the BNB Smart Chain.