Farming is the action of taking cash incentives in exchange for providing liquidity.
The same way CEXes incentivise market makers by offering fee rebates, AMM-based DEXes incentivise liquidity providers by offering farming rewards.
In layman’s terms, the goal is simple; to attract activity and demand for the product. While new companies, such as Gauntlet, are working successfuly on improving the distribution of incentives according to actual demand (to avoid waste of incentives), few to none are looking at the distribution of incentives, or the wealth structure inside the farming population.
Below is a table of the wealth structure of eight farms on Ref. Data were taken a few weeks ago.
For example, you can read that the poorest 50% of the USDT<>wNEAR farming population own 0.002% of the farm, thus is entitled to 0.002% of the farming rewards.
Yes, the rewards must be proportional to the risks. The more you take (risks), the more you potentially get.
Yet, it’s worth noting that the wealth concentration across the above farms, at the exception of UTO<>wNEAR, is more extreme than that of the ‘real world’.
The richest 10% own around 60-80% of wealth in the various world regions. The poorest 50% always own less than 5%. - Thomas Picketty, World Inequality Report 2022
My objective is to invite the reader and our users to think about ways to improve the distribution of incentives, (also) taking into account extreme wealth concentration.
A few raw thoughts/ideas below:
- Progressive farming rate
|Multiple of Average Share||Farming Rate|
For example, if a farmer has more than 5 times, but less than 10 times, the shares of the average farmer, his/her farming rate would be 0.98%.
Taking the REF<>wNEAR farm, where the farming APR is approx 94%, for example, will lead to the following new farming APR:
- Richest farmers (multiple of average share between 100 and 1,000): 38%
- 2nd richest farmers (multiple of average share between 10 and 100): 85%
Cons of such a model:
- Confiscate sentiment vs. reward big liquidity providers
- Easy to get around programmatically; multi accounts management
- Positive contribution
Imagine if one could relate and assess the farmer positive contribution to the ecosystem and adjust farming rewards accordingly.
Such a system would be possible once the bridge between DeFi and Identity/Reputation is built.
[…] Start experimenting with public goods funding, governance/DAOs, decentralized identity/reputation, regenerative finance and privacy tools. - sassal.eth
- Locked farming
The idea that the incentives must be aligned with a commitment in the mid/long term, rather than encouraging short term cycles.
The new farming contract will incentivise locked LP tokens.
- Capped rewards
Obviously, all the above could not be considered in isolation. It would require a significant shift of mentality in the ecosystem, in order to create a Nash Equilibrium, where the outcome would be sustainable vs. (today) unsustainable.