ICOs vs yield farming; the psychology of perceived potential loss

As you might have noticed, we’ve been at building DAIHard and SmokeSignal for some time now and have a long history in both crypto media and code.

However, in spite of having two novel products, both with very serious implications if successful, some projects still gather multiple millions of dollars around them, with very little marketing and basically copy pasta of existing projects.

So, while we’re still gathering funds from the sale faster than we’re spending it, we do need to ask the question why, after at least some marketing and evidence that we are building real product, do we lag blatant rug pull scams?

My conclusions on this is that the differences between an ICO and a yield farming scheme are quite significant psychologically. Essentially in an ICO you are giving money to a project in return for a token, that you hope, will be worth more in the future. In a yield farming scenario, you are lending a project funds in return for a token that you hope has a higher return than your funds would see elsewhere. However, if you no-longer like the arrangement you can safely pull your liquidity at any time and keep the tokens you’ve earned.

In an ICO a participant knows that he is parting with his money permanently if the token he is getting underperforms. In yield farming, the perception is, that he is only giving up opportunity cost and is basically getting the token “for free”. In practice this is definitely not the case and depending on the construction of the pool, can generate significant losses to the liquidity provider.

So what is an honest project to do?

My first principles thinking on the matter has lead me to the following conclusion. Team Toast is still disproportionally responsible for all growth activity on Foundry. The three main targets are; Build governance, gather a wide variety of competent $FRY holder, fatten the treasury so that Foundry can do something interesting.

To support the goals of gathering more $FRY holders and to increase the Foundry treasury. We’ve been mainly taking a traditional marketing approach. This has actually been quite enjoyable to me personally and I’ve learned a lot. It does however detract from the building of fully functional governance the way we want it.

My argument here is that we can greatly accelerate all three goals if we can successfully add a yield farming component to Foundry. Reason being that yield farming will attract more liquidity, more liquidity will attract more speculators as they can take significant bets on Foundry both short term and long term without adversely affecting the market price. IE they know that their buy or sell did not significantly move the market and that their capital. When a buyer buys a significant amount and can see a very large % move in price, they can be sure than an existing holder can likely move the price down by that same amount rather easily.

In our case the sale is being used to arbitrage the secondary market. The sale only emits 30,000 $FRY per bucket. Therefore the wider the supply of liquidity, and the broader amount of circulating $FRY it represents, the smaller the impact of the 30k $FRY will be on the market price. The smaller that impact is, the more comfortably speculators can participate in the market. The more speculators are drawn in, the broader the base of people who understand Foundry will be and the more long term holders we should attract.

So what I want to recommend is that we do a 1 week experiment to see what the results of yield farming could be for liquidity.

  1. We select a pool that already has the most liquidity, in this case $ETHFRY on Uniswap.
  2. We construct a yield farming event paying out $10,000 in $FRY (around 2.5 million at current prices)
  3. We measure specifically the number of $FRY holders before and after the experiment.
  4. We measure the liquidity before the event and after the event.
  5. We determine the projected treasury after the event at the current income rate so that we can use any funds gathered above that projecting to replace the liquidity that will recede again after the event.

To provide Foundry with liquidity and risk the impermanent losses on AMMs a liquidity provider will have to calculate if the share of $10,000 they can get will provide them with an APY that is acceptable. If we assume that this level is 100% APY (could be far higher or far lower), then it stands to reason that Liquidity providers will be willing to supply at least as much liquidity for a year. A week long experiment of $10,000, that would translate into an annualized return of $520,000. So we can guess that somewhere on the order of $100-$500k in new liquidity should form for the week, and then recede again as the liquidity is removed. Since the sale will continue regardless, we should assume that arbitrage between the sale and Uniswap will continue, any additional funds can then be used after the week is over to replenish the receded liquidity.

If the measurements on this experiment are anywhere as encouraging as the permafrost experiment was, I will next recommend that we augment our $FRY offering into.

  1. A permafrost-like sale emitting 50,000K $FRY per day.
  2. A yield farming program emitting 50,000K $FRY per day.
  3. An air drop to all exiting $FRY holders of double their tokens before the launch of the two programs.

This should then ensure, broad liquidity, safe entry and exit into the secondary market for most participants, significant incomes to the treasury.

1 Like

By means of buying fry on the open market and adding it as liquidity on UniSwap?

What is the specific rationale behind this?

This seems to be quite a bit of dilution, especially point 3.

It keeps the capital structure exactly the same?

Will existing LPs in the balancer and UniSwap pools be considered as well?

Maybe clarify what you mean by considered. Do you mean will those pools be considered as staking pools?

Considered for the airdrop…