Liquidity mining, a phenomenon that reshaped the decentralized finance (DeFi) landscape, began gaining widespread attention in June 2020 when Compound launched its "lending to mine" model. This innovation not only popularized DeFi but also led to a significant increase in on-chain activity, causing gas fees to remain high for an extended period. For instance, when Curve distributed its governance token in August 2020, a single deposit transaction on Curve could cost around 0.3 ETH with a Gas Price of 250 GWEI.
While liquidity mining helped many projects with their cold launches, it also created a substantial bubble. The market began redefining project valuations, and many leading DeFi tokens saw their prices drop by up to 90% from their all-time highs.
Despite the current crypto bear market, the DeFi ecosystem has experienced massive growth 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. This represents an increase of approximately 116 times from the $1.1 billion recorded on May 31, 2020. However, it also marks a 53.7% decline from the all-time high of $277.98 billion on December 3, 2021.
Over these two years, top DeFi projects have built strong brand moats and continuously innovated, releasing new versions to provide better products for the market. Today, liquidity mining has become more rational. This article explores the current state of 10 early DeFi projects after the hype subsided.
Uniswap
Uniswap was first launched in November 2018 and has consistently innovated to solidify its leading position. It started with Uniswap V1, which only allowed ERC20 tokens to be paired with ETH. Uniswap V2 then enabled liquidity pools for any ERC20 token pair, and Uniswap V3 introduced concentrated liquidity and customizable fee tiers.
In May 2022, Uniswap's trading volume was approximately $62.6 billion, a 220-fold increase from the $284 million recorded in May 2020. However, it was down 26.1% from the peak of $84.7 billion in May 2021. As of May 31, 2022, Uniswap's liquidity stood at $5.97 billion, a 43.1% decrease from the all-time high of $10.5 billion on December 1, 2021.
The V3 update increased Uniswap's market share to 74%. Previously, most decentralized exchanges (DEXs) charged a default fee of 0.3%, while centralized exchanges like Binance offered fees below 0.1%. With Uniswap V3, traders can enjoy lower fees due to more concentrated liquidity near market prices. This also allows liquidity providers to achieve higher capital efficiency and better returns.
For example, on June 2, the USDC/ETH pool with a 0.05% fee tier had lower liquidity than the 0.3% tier. However, the trading volume for the 0.05% pool was about nine times higher over the past seven days, meaning liquidity providers in that tier earned more transaction fees.
SushiSwap
Launched in late August 2020, SushiSwap was an early fork of Uniswap. It attempted a vampire attack on Uniswap by offering liquidity mining rewards for users who staked their Uniswap LP tokens on SushiSwap. At its peak, some pools offered annual percentage rates (APR) exceeding 1000%. After a period, this liquidity automatically migrated from Uniswap to Sushi.
However, after Uniswap released its own token, SushiSwap lost its competitive edge. Despite expanding to over ten blockchains and adding features like Kashi for lending and Miso for initial DEX offerings (IDOs), it still lacks a core competitive advantage. Leadership changes have also been a persistent issue. In September 2020, founder Chef Nomi transferred control, and in September 2021, anonymous leader 0xMaki announced his departure.
According to Defi Llama, Sushi's liquidity is now $2.07 billion, down 70.6% from the peak of $7.04 billion on November 9, 2021. Its trading volume in May 2022 was $3.93 billion, an 84.4% decrease from the $25.2 billion peak in May 2021.
Curve
Launched in January 2020, Curve dominates the stablecoin trading market. The rise of "Curve Wars," driven by competition from Convex and similar projects and the emergence of algorithmic stablecoins, has forced market participants to buy and stake CRV to control its emission. This helps attract more liquidity for their preferred stablecoins on Curve.
Uniswap V3 competes with Curve in the stablecoin market by offering a 0.01% fee tier. Meanwhile, Curve has innovated to enter the cross-asset trading market. For instance, Curve partnered with Synthetix to enable cross-asset swaps. A trade like DAI to WBTC would first convert DAI to sUSD on Curve, then sUSD to sBTC via synthetic asset trading on Synthetix, and finally sBTC to WBTC on Curve. However, with SNX's declining market cap, synthetic asset liquidity is limited, restricting large trades.
Curve's tricrypto2 pool has accumulated over $470 million in liquidity, with roughly equal parts USDT, WBTC, and WETH. The current trading fee is 0.069%, providing a low-fee, low-slippage trading route for the top three cryptocurrencies by market cap.
Currently, Curve's total liquidity across all chains is $8.93 billion, down 63.3% from the $24.3 billion high on January 5, 2022, but up about 700 times from the $12.75 million two years ago.
Bancor
Bancor's whitepaper was published in February 2017, and it invented the liquidity pool concept, creating one of the first automated market maker (AMM) DEXs. Starting with Bancor V2, it supported single-sided liquidity provision and impermanent loss protection.
Bancor's original vision was to provide liquidity for long-tail assets paired with its native token, BNT. Thus, its initial product was similar to Uniswap V1. Before Bancor 3, all tokens had to be paired with BNT. In today's market, where capital efficiency is paramount and fees are increasingly competitive, this model—requiring all trades to go through BNT—became outdated.
In May 2022, Bancor 3 launched with a new Omnipool architecture that consolidates all token liquidity into a single virtual vault. This reduces gas costs, improves efficiency, and allows trades to occur via the best path instead of mandating BNT as an intermediary. Bancor's current liquidity is $620 million, down 74.4% from the $2.42 billion high on May 10, 2021.
Synthetix
Synthetix evolved from the stablecoin project Havven and changed its monetary policy in February 2019. Yearn founder Andre Cronje once tweeted that "Kain and Synthetix invented liquidity mining." Synthetix founder Kain responded that the inspiration came from Livepeer and Fcoin. At the time, it was called an "LP reward system" before the term "liquidity mining" was coined.
Synthetix is a synthetic asset protocol that allows users to mint synthetic versions of cryptocurrencies, indices, stocks, and more by overcollateralizing SNX tokens. Its primary synthetic asset is the stablecoin sUSD. The current sUSD supply is 98.7 million, a 12.1-fold increase from two years ago (7.53 million) but down 70% from the August 25, 2021, high of 329 million.
Yearn
Yearn, launched in July 2020, emerged after the rise of liquidity mining and pioneered fair token distribution. It is a representative yield aggregator that pools user funds to participate in liquidity mining on protocols like Curve. Yearn takes a performance fee from the mining rewards as protocol revenue. By locking a significant amount of CRV tokens, Yearn offers users higher yields than solo mining and saves them gas fees from manual compounding.
However, with competitors like Convex entering the space and liquidity mining yields declining, Yearn's market share has shrunk. The DeFi risk-free rate—comprising Curve's 3pool, Aave V2 USDC deposits, and Compound USDC deposits—has fallen to around 1%. Yearn's performance is tied to its assets under management. Its current TVL is $1.19 billion, down 82.8% from the $6.91 billion high on December 4, 2021. Due to declining revenue and ongoing operational costs, Yearn has been operating at a loss since the beginning of this year.
MakerDAO
One of the earliest DeFi projects, MakerDAO initially launched the single-collateral SAI (backed only by ETH). In November 2019, it transitioned to the multi-collateral DAI we know today.
After the market crash on March 12, 2020, MakerDAO aggressively expanded its supported collateral types. It now offers four ways to mint DAI: over-collateralization, the Peg Stability Module (PSM), real-world asset collateral, and the Direct Deposit Module (D3M). The PSM, which allows users to mint DAI with other stablecoins, accounts for nearly half of all DAI in circulation. This provides sufficient exit liquidity and makes DAI increasingly similar to centralized stablecoins.
As a soft-pegged stablecoin, DAI has maintained its peg remarkably well, rarely trading significantly below $1 for extended periods. During the extreme market conditions on March 12, 2020, it experienced a 10% premium. However, with the addition of more collateral types and the PSM, such events are unlikely to recur.
DAI is currently the largest decentralized stablecoin by market cap, with a circulation of 6.76 billion. This is down 34.9% from the all-time high of 10.38 billion on February 15, 2022, but represents a 51-fold increase from the 129 million circulating two years ago.
Aave
Originally named EthLend, Aave raised funds in 2017 and rebranded in 2018. It launched a liquidation mechanism in Q2 2019 and has undergone multiple upgrades since. The latest, Aave V3, improves cross-chain liquidity and capital efficiency. It has been deployed on Polygon, Fantom, Avalanche, Arbitrum, Optimism, and Harmony.
However, most of Aave's activity remains concentrated on Aave V2 on Ethereum mainnet, Avalanche, and Polygon. Aave V3 on all networks has less than $100 million in deposits. Currently, total deposits on Aave V2 across all networks are $12.56 billion, with borrows at $3.6 billion, resulting in a TVL of $8.96 billion. Total deposits are down 60.2% from the peak of $31.59 billion on October 26, 2021, but are 161 times higher than two years ago.
Compound
Launched in September 2018, Compound is one of the earliest DeFi projects. It gained fame in June 2020 by introducing its governance token through a "lending to mine" model, which kicked off the liquidity mining trend.
However, Compound has lacked innovation in its subsequent development and missed opportunities in the multi-chain expansion. Its proposed Compound Chain has not launched, allowing Aave to pull ahead.
Compound has also experienced operational issues. On November 26, 2020, the price of DAI on Coinbase Pro surged to $1.34, causing an oracle price anomaly on Compound that triggered over $80 million in forced liquidations. On September 30, 2021, a bug in the executed Proposal 62 led to the erroneous distribution of approximately 280,000 COMP tokens (worth around $80 million at the time), which were supposed to be released slowly.
Currently, Compound holds about $5.62 billion in deposits and $1.29 billion in borrows, with a TVL of $4.33 billion. Despite the large market size, the number of unique users is low. According to Dune Analytics, over the past 30 days, Compound averaged only 78 daily depositors and 24 borrowers. Protocol revenue comes from the spread between deposit and borrow rates. Higher borrowing volumes and rates increase revenue. Current borrows are down 86.1% from the peak of $9.31 billion on September 6, 2021.
dYdX
dYdX is a decentralized exchange offering perpetual contracts, margin trading, and lending services. Founded in July 2017, it launched margin trading and lending in 2018. In February 2021, dYdX launched its cross-margin perpetual contracts product on StarkEx, powered by StarkWare, which has become its main offering.
The introduction of its governance token and liquidity mining pushed dYdX's trading volume and open interest to new highs. However, as the price of DYDX token fell, so did trading volume.
For example, take the BTC/USD pair on dYdX's L2. Official statistics show that from May 29 to June 4, 2022, the weekly trading volume was $1.77 billion. This is an 89.8% decrease from the week of February 13-19, 2022, when volume reached $17.27 billion.
Key Takeaways and Future Outlook
The most successful DeFi projects—Uniswap, MakerDAO, and Aave—have been around for years. Their brand strength has created a moat that helps them maintain an advantage against forked competitors.
Continuous innovation is crucial for market leadership. Uniswap and Curve enhanced their core trading functionalities, strengthening their competitiveness. Multi-chain expansion has become a trend, helping established projects reach wider markets.
Although recent DeFi metrics have declined significantly, the overall TVL, Uniswap's monthly trading volume, and Aave's deposits are still hundreds of times higher than they were two years ago. This indicates substantial foundational growth despite market cycles.
The ecosystem continues to evolve, with new solutions focusing on scalability, user experience, and sustainable yield generation. For those looking to dive deeper into the mechanisms of these protocols or explore advanced yield strategies, numerous resources are available. 👉 Explore advanced DeFi strategies
Frequently Asked Questions
What is liquidity mining?
Liquidity mining is a process where users provide liquidity to a DeFi protocol in exchange for rewards, typically in the form of the protocol's native token. It helps bootstrap liquidity and decentralize token distribution.
Why have some early DeFi tokens lost significant value?
Many early DeFi tokens experienced massive hype and speculation during the 2020-2021 bull market, driving prices to unsustainable levels. The subsequent bear market, coupled with increased competition and sometimes slower innovation, has led to a correction in valuations.
What is the difference between Uniswap V2 and V3?
Uniswap V2 allowed for liquidity pools between any two ERC-20 tokens with a uniform 0.3% fee. Uniswap V3 introduced concentrated liquidity, allowing liquidity providers to specify price ranges for their capital and choose from multiple fee tiers (0.01%, 0.05%, 0.3%, 1%), greatly improving capital efficiency.
Is providing liquidity still profitable?
Profitability depends on market conditions, the specific pool, and impermanent loss. While yields are generally lower than in 2020, opportunities still exist, especially in stablecoin pools or with advanced strategies on V3-style AMMs. Always assess the risks involved.