The “Liquidity Provision Incentive” Strategy in DeFi Just got Proven Out — By Launching a Token from $0 to $7,000,000.
tl;dr and conclusion at the end.
I’m Clayton and I’m a community director at DeFi Nation. This is a passion writeup, not a shill piece — I don’t care if you buy this token but you sure can learn from it.
Now, if you’re one of those neurotic people who love stomach acid burning through your stomach lining, you know this screen above ☝️☝️☝️
This is the screen of the biggest gainers in crypto. Typically they are flavors of the week, P&D (pump-and-dumps), low-liquidity shitcoins. Gambling by a different name.
However, I will argue here that there is something to be learned from one of the projects on this list: XIO. I’m mostly interested in how the hell they gave away all their tokens for free and are now worth $3-$7mm. You can read about the product itself here because I’ll keep this piece about the community and the token.
The XIO token did this last week:
It looks like an ICO or Binance listing right? Except normally those spikes are on the other side of the graph!
How to Build a Fire
Option not pictured: dump a lot of gas on it.
If you didn’t know better, you would probably think XIO is a gas fire — Burns bright and fast. But I was a boy scout who prided himself on one-match fires and I saw how this one was built. It would be worth reviewing that for anyone looking to launch their own token.
Turn back 6 months. I met Zachary Dash in the DeFi Nation community I lead. He is the founder of XIO.
I peeked back and saw that XIO is “another erc20” token that was in obscurity. And I mean OBSCURE. If you dug through the token on etherscan you would have seen a bunch of token holder addresses, but no exchanges, and no way to determine a market price (not yet on the gecko or CMC).
What caught my interest is that the tokens were given away for free. They never had a raise event.
Now Dash looks healthy — it doesn’t look like he’s been eating cans of foodbank beans while building a crypto startup — But he certainly wasn’t getting any money from it.
Step 1: Tinder — Identify Your Community
Dash choose his XIO community from a previous community project he created that got a lot of attention called BOMB token. He airdropped those same addresses with XIO and got people participating.
There are alternative ways to grow a project in the decentralized world without raising a bunch of capital.
— Z. Dash
This intrigues me because I was a tokenomics advisor in 2017. I’d get on calls with the teams I advised, and together we would abuse spreadsheet cells with formula after formula to determine reward tranches, bonuses, discounts, blah blah, lock periods, whales coming into the market, average token price, blah blah. None of this matters when your average token price is ZERO and you only have UP to go.
Imagine what you’re doing here. You give a bunch of people a scarce asset with provable ownership and say here: hold onto this (or don’t.) Let’s talk about what to do with it, as a group. Here’s what I’m thinking. What are you thinking?
Step 2: Kindling — Mobilize Your Community
He started by sharing his idea: a y-combinator-like project that helps startups get liquidity, but not necessarily fundraise in the typical sense. His whole philosophy is to put the idea out there first and see if there is a community that believes in it. To be clear, not many businesses could actually launch into their market without any money — But they can test how effective their idea might be with a motivated community.
He used a social tracking and reward system to get the word out — familiar but elegantly executed.
XIO uses this social program to reward people for participating. I don’t personally love rewarding social interaction, it feels a bit like paying a girl to like me, but I get it — And he has managed to build a culture around quality. When empty airdrop hunting people leave low-quality comments, his tight community usually piles on to punish them.
The result is a social presence and a magnet to pull in other token owners. But perhaps even more than that is a group of people who feel the sweat equity they earned. They got the first coins for free, but they also feel a price of the token because they worked for it. This creates a “market cap” if only a sweat-equity one, before being listed on CMC or coingecko.
Step 3: Fuel Wood — Build Liquidity
What the XIO community decided is to reward people who provide liquidity on Uniswap. The first people to put in liquidity would benefit the most, but everyone who contributed would receive monthly drops of tokens. The result after this huge pump is that those who believed in the project and were willing to pair it next to ETH will have huge wins over the next year.
Uniswap gave us, for the first time, the ability to control our own destiny in terms of liquidity.
— Z. Dash
The program rewards how early you come in as well as how long you leave your stake.
This is an example of a community saying to the world: We want liquidity for this and we’re willing to tie up some capital (with some small risk of impermanent loss) to prove it. 25% of the tokens right now are set aside as a reward for providing liquidity on Uniswap. Similarly to what Synthetix did with SNX tokens, XIO rewards people who stake on Uniswap.
Another 25% are set as a reward for their XIO social program.
Spark that match!
So what finally sparked the match to light the fire? Just like building fires as a kid in Boy Scouts, there was a bit of luck to the “one-match” fires. Dash describes what happened to have this outcome:
I would say it started after someone posted on a few subreddits (r/ethereum)
Then crypto twitter — a few youtubers
Then when volume picked up, probably seeing it on uniswap/coingecko
Most of it would be from word of mouth but that is hard to measure
This is perhaps the part of the formula we “haven’t figured out” as clearly as the above steps, I’ll admit. But to continue the story of building a fire, if you get all the fuel set up properly, any spark will ignite it.
What we see, of course, is pump-chasing activity. Dash describes this as “A bittersweet moment.” Sure, he’s happy to see his community take off and many of his dedicated be rewarded. But now he’s in the world of pump-chasers and people focusing on the price instead of product — This will be his next test to carry his community — and the XIO token value — through to the next stage.
Tl;dr and Conclusion
The “Liquidity Provision Incentive” model has been tested and proven out several times, but this is the first time it was tested with a pure airdrop token. It replaces the “Pay Binance $1mm” to list in 2017–2018 — And it actually requires quite a lot less capital than that. The actual economic mechanism of it has a certain elegance. It requires that people be willing to “tie up” ETH (and so be long-ETH) next to a token that has not yet proven itself.
What are the possible outcomes? Well, any dramatic price movement between the alt itself and ETH will result in impermanent loss. Indeed, I was providing a small amount of XIO paired with ETH and after the pump I was worse off than if I’d just been holding XIO and ETH.
Except, get this — Because I was doing that, I will continue to receive the 10% monthly payout of my original stake of XIO. In the long run, so long as the token continues to be valuable, I will be much better off. This reward aligns my incentives in such a way that I will really benefit if the token continues to have a meaty price. Furthermore, the only reason the token was able to take off was because of other members of the community did that same thing.
I’ll give you the napkin math: I staked 5000 XIO and about .5 ETH, but ended up with 1.2 ETH and 1200 XIO after the pump. However, I’ll receive 500 XIO each month — So holding all else constant, I’ll be earning XIO over that “loss” (plus the free ETH) in (5000–1200)/500 = 7.6 months.
After that is pure gravy, and now I’m
1. being rewarded for being an early believer and
2. incentivized to contribute to the effort.
The “Liquidity Provision Incentive” model has certain similarities to a ponzi scheme, as you’re rewarding people for hording something and promising to give them more of it later. Time will tell if it is an effective mechanism to bootstrap quality projects —but we have one more data point above that says it is.
To close, I have a question for YOU: How will Balancer, Bancor V2 and Uniswap V2 chance or enhance this strategy?
DISCLOSURE: I lightweight advised XIO which explains why I know these details. This is not investment advice nor is it meant to imply any future valuation of XIO — It is informational about the past, not speculative.
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