Skip to main content
SpringerLink
Log in

Towards understanding governance tokens in liquidity mining: a case study of decentralized exchanges

  • Published:
World Wide Web Aims and scope Submit manuscript

Abstract

The boom of liquidity mining has attracted enormous attention, which has brought tens of times increment in total value locked (TVL) to decentralized finance (DeFi) community. Meanwhile, governance tokens, as part of the liquidity mining reward, have been adopted by most decentralized applications (DApps) to attract users. However, the effectiveness of this method has not been proven in detail. In this paper, we choose one of the most representative cases where SushiSwap absorbed a significant amount of Uniswap liquidity in no time by forking Uniswap’s code and issuing the governance token ahead to understand the governance tokens in liquidity mining. Specifically, we collect transaction records of Uniswap and SushiSwap for over a year and perform a detailed analysis of liquidity providers’ (LPs) activities. Moreover, we design a scalable unsupervised clustering method, which uses metrics between transaction flows to build a similarity graph that can capture patterns between LPs with similar behaviour. These LPs range from inactive and cautious LPs, providing tiny liquidity to risk-seeking LPs, focusing on short time-intervals. On this basis, we discuss how the governance token affects liquidity mining, and use its impact on behaviours and decision-making to explain its attractiveness to users.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Figure 1
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
Figure 7
Figure 8
Figure 9
Figure 10

Similar content being viewed by others

Notes

  1. https://idex.io/

  2. https://synthetix.io/

  3. https://chain.link/

  4. https://compound.finance/

  5. https://sushi.com/

  6. https://uniswap.org/

  7. https://defipulse.com/

  8. The users here represent the LPs and traders of DEXs.

  9. The APY is the rate of return on the investment, considering the effect of compounding interest.

  10. The ERC-20 introduces a standard for fungible tokens, in other words, they have a property that makes each token be exactly the same (in type and value) of another token.

  11. Everyone who calls smart contracts on the blockchain must pay a gas fee to miners, determined by the gas and gas prices.

  12. UNI-V2 tokens represent supplied liquidity in Uniswap. If an LP provides liquidity in Uniswap, it will receive a certain number of UNI-V2 tokens. When the liquidity is removed by the LP, the UNI-V2 tokens will be destroyed.

  13. The classified the existing business model as decentralized currencies, decentralized payment services, decentralized fundraising and decentralized contracting.

  14. https://etherscan.io/

  15. We have taken the price at the time of transactions made in the paper. We believe this value can better reflect LP’s decisions and behaviours and is the most feasible and persuasive solution to make the data discrete.

  16. https://www.coingecko.com/

  17. Considering the most crucial anonymity feature of blockchain, we follow the assumption made by Lee [29], which also takes an address as the basic unit

References

  1. Fenu, G., Marchesi, L., Marchesi, M., Tonelli, R.: The ico phenomenon and its relationships with ethereum smart contract environment. In: 2018 International Workshop on Blockchain Oriented Software Engineering (IWBOSE), pp 26–32. IEEE (2018)

  2. Xu, J., Vavryk, N., Paruch, K., Cousaert, S.: Sok: Decentralized exchanges (dex) with automated market maker (amm) protocols. arXiv:2103.12732 (2021)

  3. Adams, H., Zinsmeister, N., Robinson, D.: Uniswap v2 core (2020)

  4. Lo, Y.C., Medda, F.: Uniswap and the rise of the decentralized exchange Available at SSRN 3715398 (2020)

  5. Wood, G.: Ethereum: A secure decentralised generalised transaction ledger (2020)

  6. Zou, W., Lo, D., Kochhar, P.S., Le, X.-B.D., Xia, X., Feng, Y., Chen, Z., Xu, B.: Smart contract development: Challenges and opportunities. IEEE Transactions on Software Engineering 47(10), 2084–2106 (2021). https://doi.org/10.1109/TSE.2019.2942301

    Article  Google Scholar 

  7. Swan, M.: Blockchain: Blueprint for a New Economy. O’Reilly Media Inc (2015)

  8. Fan, S., Zhang, H., Wang, Z., Cai, W.: Mobile devices strategies in blockchain-based federated learning: a dynamic game perspective. In: IEEE Transactions on Network Science and Engineering (2022). https://doi.org/10.1109/TNSE.2022.3163791

  9. Wang, Z., Qin, K., Minh, D.V., Gervais, A.: Speculative multipliers on defi: Quantifying on-chain leverage risks. Financial Cryptography and Data Security (2022)

  10. Tolmach, P., Li, Y., Lin, S.-W., Liu, Y.: Formal analysis of composable defi protocols. In: International Conference on Financial Cryptography and Data Security, pp. 149–161. Springer (2021)

  11. Fan, S., Zhang, H., Zeng, Y., Cai, W.: Hybrid blockchain-based resource trading system for federated learning in edge computing. IEEE Internet of Things Journal 8(4), 2252–2264 (2020)

    Article  Google Scholar 

  12. Zhang, H., Fan, S., Cai, W.: Decentralized resource sharing platform for mobile edge computing. In: International Conference on 5G for Future Wireless Networks, pp. 101–113. Springer (2020)

  13. Nakamoto, S.: Bitcoin: a Peer-To-Peer Electronic Cash System. Technical report, Manubot (2019)

  14. Buterin, V., et al.: A next-generation smart contract and decentralized application platform. White Paper 3(37) (2014)

  15. Min. T., Cai W.: Portrait of decentralized application users: an overview based on large-scale Ethereum data[J]. CCF Trans. Pervasive Comput. Interact. 1–18 (2022)

  16. Cai, W., Wang, Z., Ernst, J.B., Hong, Z., Feng, C., Leung, V.C.: Decentralized applications: The blockchain-empowered software system. IEEE Access 6, 53019–53033 (2018)

    Article  Google Scholar 

  17. Duan, H., Li, J., Fan, S., Lin, Z., Wu, X., Cai, W.: Metaverse for social good: a university campus prototype. In: Proceedings of the 29th ACM International Conference on Multimedia, pp. 153–161 (2021)

  18. Min, T., Wang, H., Guo, Y., Cai, W.: Blockchain games: A survey. In: 2019 IEEE Conference on Games (CoG), pp. 1–8. IEEE (2019)

  19. Jiang Y, Fan S, Cai W. Economic Analysis of Loot Box Market in Blockchain Games[C]. In: Proceedings of the Fourth ACM International Symposium on Blockchain and Secure Critical Infrastructure, pp. 35–46 (2022)

  20. Zetzsche, D.A., Arner, D.W., Buckley, R.P.: Decentralized finance. Journal of Financial Regulation 6(2), 172–203 (2020)

    Article  Google Scholar 

  21. Zhang, H., Fan, S., Fang, Z., Cai, W.: Economic Analysis of Decentralized Exchange Market with Transaction Fee Mining. In: Proceedings of the Fourth ACM International Symposium on Blockchain and Secure Critical Infrastructure (BSCI '22), pp. 59–70. Association for Computing Machinery, New York, NY, USA (2022). https://doi.org/10.1145/3494106.3528677

  22. Qin, K., Zhou, L., Afonin, Y., Lazzaretti, L., Gervais, A.: Cefi vs DeFi – comparing centralized to decentralized finance (2021)

  23. Froewis, M., Sridhar, K., Makridis, C., Böhme, R.: The rise of decentralized cryptocurrency exchanges: Evaluating the role of airdrops and governance tokens Available at SSRN (2021)

  24. Chen, Y., Bellavitis, C.: Blockchain disruption and decentralized finance: The rise of decentralized business models. Journal of Business Venturing Insights 13, 00151 (2020)

    Article  Google Scholar 

  25. Angeris, G., Kao, H. -T., Chiang, R., Noyes, C., Chitra, T.: An analysis of uniswap markets. arXiv:1911.03380 (2019)

  26. Aigner, A.A., Dhaliwal, G.: Uniswap: Impermanent loss and risk profile of a liquidity provider. arXiv:2106.14404 (2021)

  27. Krishnamachari, B., Feng, Q., Grippo, E.: Dynamic Automated Market Makers for Decentralized Cryptocurrency Exchange. In: 2021 IEEE International Conference on Blockchain and Cryptocurrency (ICBC), pp. 1–2. https://doi.org/10.1109/ICBC51069.2021.9461100 (2021)

  28. Wang, Y., Heimbach, L., Wattenhofer, R.: Behavior of liquidity providers in decentralized exchanges. arXiv:2105.13822 (2021)

  29. Lee, X.T., Khan, A., Sen Gupta, S., Ong, Y.H., Liu, X.: Measurements, analyses, and insights on the entire ethereum blockchain network. In: Proceedings of The Web Conference 2020, pp. 155–166 (2020)

  30. Wang, G., Konolige, T., Wilson, C., Wang, X., Zheng, H., Zhao, B.Y.: You are How You Click: Clickstream Analysis for Sybil Detection. In: 22Nd {USENIX} Security Symposium ({USENIX} Security 13), pp. 241–256 (2013)

  31. Houle, M.E., Kriegel, H.-P., Kröger, P., Schubert, E., Zimek, A.: Can shared-neighbor distances defeat the curse of dimensionality?. In: International Conference on Scientific and Statistical Database Management, pp. 482–500. Springer (2010)

  32. Wang, G., Zhang, X., Tang, S., Zheng, H., Zhao, B.Y.: Unsupervised clickstream clustering for user behavior analysis. In: Proceedings of the 2016 CHI Conference on Human Factors in Computing Systems, pp. 225–236 (2016)

  33. Elmqvist, N., Fekete, J. -D.: Hierarchical aggregation for information visualization: overview, techniques, and design guidelines. IEEE Trans. Vis. Comput. Graph. 16(3), 439–454 (2010). https://doi.org/10.1109/TVCG.2009.84

    Article  Google Scholar 

Download references

Acknowledgements

This work was supported by Shenzhen Science and Technology Program (Grant No. JCYJ20210324124205016).

Author information

Authors and Affiliations

  1. School of Science and Engineering, The Chinese University of Hong Kong, Shenzhen, China

    Sizheng Fan, Tian Min & Cai Wei

  2. White Matrix, Nanjing, China

    Xiao Wu

Authors
  1. Sizheng Fan
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Tian Min
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Xiao Wu
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Cai Wei
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Cai Wei.

Ethics declarations

Conflict of Interests

The authors declare that they have no conflict of interest.

Additional information

Publisher’s note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

This article belongs to the Topical Collection: Web-based Intelligent Financial Services

Guest Editors: Hong-Ning Dai, Xiaohui Haoran, and Miguel Martinez

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Fan, S., Min, T., Wu, X. et al. Towards understanding governance tokens in liquidity mining: a case study of decentralized exchanges. World Wide Web 26, 1181–1200 (2023). https://doi.org/10.1007/s11280-022-01077-4

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11280-022-01077-4

Keywords

Search

Navigation