The main problem with Defi is liquidity. The simplest example: If there is no liquidity in a particular pair on Uniswap, you will not be able to make exchanges in that pair. If there is liquidity, but very little, you will not be able to make exchanges, as there will be a strong price change and you will not buy the asset at the market price, but several times more expensive. The simplest example: I have an XY Finance coin. One coin is worth $1.3 and I can sell it at that price in small quantities.
But suppose I want to sell 50,000 coins, which equals $67,000 at the market rate. It turns out that there is not enough liquidity, and if I want to sell that many coins, I will get not 67000$, but 57000$. Due to lack of liquidity, I will lose $10k. The difference is extremely big, you can see it in the example below:
And that is not all, it is often difficult for a new project to get enough liquidity for its platform. Take the Geist Finance project as an example, which is a lending protocol. I don't think many people would go there early on and put their money into a lending platform to get liquidity at a low interest rate when there are bigger and safer protocols.
Geist Finance when it launched in October made an of about 1000% APR, thereby attracting a bunch of Degens with money. Liquidity was great, problem solved!
But no, there is a new problem. It is impossible to provide 1000% APY all the time, otherwise the price of the asset will fall rapidly, which is exactly what happened to Geist, the price fell three times in a week, it is clearly visible on this chart:
Therefore, gradually interest rates began to fall, which entailed other negative things: TVL fell three times and continued to fall along with the price for several more months, you can see it all on the charts above. Conclusion: The liquidity problem is urgent and it needs to be solved somehow, so Defi 2.0 projects appear. They include Tokemak, Olympus Dao, Ondo Finance and Reft Finance. Each of them has its own approach and if we analyze each of them in this article, it will become quite big. So today we will analyze Ondo Finance project, and next time, I would like to draw your attention to Reft Finance.
**Ondo Finance и Fei Protocol - Fei Liquidity as a Service
**
As we have already understood, liquidity is a big problem. For example, if a new token is launched, it may also lack the liquidity to support all transactions. And if it is not there, buyers and sellers will not feel comfortable using the coin and they will leave. To make things as simple as possible, let's take me as an example: I created a new TES coin, but my token is still unknown and the liquidity on Uniswap is not really there. So if someone comes along who wants to buy it at the market price of $1 million, they either can't do it at all or will buy it at a greatly inflated price.
So I write Ondo Finance x Fei Protocol and offer for 3 months a partnership: I put TES for 10 million dollars in TES-FEI pool, and Fei Protocol allocates 10 million dollars in FEI and also puts them in the pool, thus my token has much more liquidity in pair with stablcoin. But that's not all, Ondo Finance is hosting a new open pool on its platform, which will run according to our agreement for 3 months and offers everyone to put either FEI or TES into the pool with several conditions:
- You can put one of the assets in the pool
- If you choose TES, your annual return at the moment is 80%, but you assume the risks of impermanent loss, because of which the percentage in the future may become negative
- If you choose FEI, your annual return until the end of the partnership will be 10% and it will not vary, you do not assume any risks.
- Once you put an asset in the pool, you can withdraw it at the end of the partnership. (3 months in our case)
*An important point - the APY is calculated based on pool commissions.
A few days pass, the pools are closed, all the money that Ondo Finance has collected from its users is blocked and put additionally into the pool. And the liquidity is no longer 10 million FEI and 10 million TES, but 15 million FEI and 15 million TES.But what is the benefit of Ondo Finance x Fei Protocol doing this? When the pool expires, all funds deposited from the pool are withdrawn, as well as 3% of the earnings on commissions in that pair. That is all. I tried to explain as clearly as possible :)