The economics of decentralized exchanges (DEXs)

Tokens as a means to bootstrap liquidity pools and the nuances with token emissions

What does it mean to bootstrap a liquidity pool, and why do tokens play a pivotal role in the formation of on-chain markets?

Why do some DEXs offer token emissions as rewards to liquidity providers on top of trading fees?

What are the nuances associated with emitting tokens to liquidity pools, and does it always result in an increase in liquidity (TVL)?

These are some of the questions I pondered when getting into DeFi a few years ago, and today, I’m taking you back to the basics and going over all these questions in a simple, concise, and not boring video (which you can find below).

Hope you enjoy!

Here’s the link to the slideshow used in the video: https://docs.google.com/presentation/d/1jgoEpqXxnHYfI9D8QC9C4kV_31LD9MZ5rsyG5OTRuXI/edit#slide=id.p

P.S.: Another reason why DEXs with exorbitant emissions don't attract as much TVL (liquidity) as incumbents is because of dilution. Sometimes, all it takes is one large deposit to dilute the yield, or in some cases, even drive it to near zero! This is why users with larger portfolios don't deposit their tokens into nascent DEXs with shallow liquidity, and why the DEXs don't attract so much liquidity even with those seemingly high APRs!

P.P.S.: In the latter half of the video, I meant Uniswap has been around since the start of DeFi — not Velodrome!

Until next time,

Imajinl