Is issuing currency a necessary condition for DEXes?

Uniswap has announced it had released the token Uni on the main Ethereum network. According to the Uniswap community announcement, the initial supply of Uni is 1 billion tokens, of which 60% will be allocated to Uniswap community members, 21.51% to team members, 17.80% to investors and 0.69% to consultants. 

This news has instantly caused a stir in the industry, with most large exchanges announcing the launch of UNI trading pairs.

But does Uniswap really need money? In other words, is issuing currency a necessary condition for a DEX to be reach the very top?

Poor experience compared with CeFi

In terms of efficiency, Uniswap is far from being comparable to CeFi. There is still much room for improvement and optimization, especially in terms of fake volumes - which exists in nearly every centralized trading platform, and now even in DeFi.

Furthermore, more and more market makers specialized in liquidity pool trading have emerged in Uniswap. In order to attract users' attention and embellish the data, the project began to realize that the transaction volume on Uniswap also need to be scaled.

Since all the operations are recorded on chain, the cost and risk of market making of the project are higher. In the past, market makers needed to obtain permission to operate, but could not control the funds. On DEXes, they need to hold the underlying assets, limiting the volume of funds that the market makers can use.

It is easy to identify the fake volume by looking at the transaction record, whether there are multiple back and forth transactions for the same address. This means that in this market, although many projects that have created a myth of hundreds of times overnight profit, investors need to be more discriminated, because it is likely that the project operator is seducing investors with this fake high price.

At present, users can only access basic information such as liquidity and transaction volume on Uniswap, but other data such as the number of liquidity pools and the number of transactions may have a greater impact on prices.

Is Liquidity mining fair?

In the spirit of community-driven and liquidity mining, DeFi has relied on the concept of "fairness" under the banner of no pre-mining and no market manipulation.

But is liquidity mining absolutely fair? Are those coin-issuing projects really not turning a profit?

The answer, of course, is no. They have at least three ways to make money.

The first is earning from liquidity providers. Or, to be more precise, to aim for their ether.

Under the Automated Market Makers (AMM) mechanism, liquidity providers need to add an equal amount of assets in two pools. For example, in the ETH/USDT pool, it is be necessary to add 1 ETH and in the ETH pool, and 1 ETH in the USDT pool.

When the pools go through pumps and dumps, the providers' ETH will turn into the project's token. For example, as the price of kimchi dropped significantly, there was more and more kimchi tokens in the hands of providers, and less and less ETH. At the same time, as the price of Kimchi was progressively getting lower, and the ETH was harvested by the project operator.

This is possible because under the mining design, the project operator will reward the project's token pool more than other pools. The mining efficiency of liquidity proviers in this pool cold be 5 times higher than that of other pools. Users who do not understand the risk are easily attracted to enter the market.

Project operators can also obtain profits by collecting a part of the mining reward. In many DeFi projects, that can can run up to 10% of the mining reward, with project operators likely to cash out step by step after collecting the mining tax.