Many Binance Smart Chain users were waiting for Cake to regain its April ATH to $ 42. Instead, PancakeSwap’s governance token lost 40% in one week. At the same time, other important token rewards suffer a fairly close fate. Is it the programmed death of these corners which embody the beginnings of DeFi? Let us come back together on the Rewards Tokens.
- The main governance tokens
- CAKE’s stability called into question
- The vaults and other protocols
- Vesting: a solution for token rewards
Decentralized finance and token reward
DeFi (decentralized finance) has been booming for almost two years. Its birth dates back to 2018, when the first decentralized exchanges appear. A pioneer of its kind on the Ethereum blockchain, the Uniswap platform launched in 2020 UNI, its governance token. It reached a capitalization of 22 billion last spring. Even today, it remains 17th in the ranking of Coinmarketcap. However, the various bullish periods this fall did not allow him to regain his ATH.
At the same time, the SUSHI but especially the CAKE suffered the same fate. In fact, they are victims of their success. Users of pools of yield farming use them very little as a governance token. That is to say to decide the orientations of the platform, which is their primary vocation. Instead, they sell them immediately and thus help to drop their price. The latest in this category, the token rewards of the Cronos blockchain took less than two weeks to see their price drop. This process, which we had already observed on the blockchains Solana, Fantom and Avalanche, new to decentralized finance, leads to a constant renewal of yield farming sites.
The CAKE, a reward for liquidity providers
Decentralized exchanges and yield farming sites face a dilemma.
They need to reward their users because they provide the liquidity to run the protocols. In exchange for this risk-taking, users are distributed rewards token with rates high enough to compensate for the impermanent loss. This distribution causes the price of these tokens to fall. And yes: if users receive a token, they will sell it so as not to suffer volatility and transform it into another asset, such as Bitcoin or a stablecoin. Thus, Rewards Tokens are massively resold. This leads to a fall in the price, and an even more massive sale, etc.
Uniswap has decided to make its token, the UNI, a governance token. The latter is distributed in addition to transaction fees for the liquidity providers for a further three years. By choosing a slow rate of distribution, the protocol avoids too rapid a fall. Especially since the main investors who keep at least 0.25% of the tokens can vote for the governance proposals.
PancakeSwap, which arrived soon after, did not take the same approach. On the contrary, the CAKE is distributed massively with an unlimited number of tokens. In addition, the platform has not chosen to make it a governance token. That said, she encourages keeping her CAKE since they can either be staked to collect tokens from other projects, or be used as lottery tickets to get other rewards. Finally, a regular burn of the token also aims to stabilize its price. However, we can notice that these mechanisms quickly reach their limits.
Their price had seen an exponential increase during the last winter. But since then, they no longer follow the progression experienced by many other cryptocurrencies since August. And the CAKE (like the SUSHI, the token of another major protocol) gradually won the twenty dollars around which it had stabilized. If this fall seems to be the end of an era, it owes it to the emergence of other types of protocols.
What solution to this fall?
The protocols put in place at the start of DeFi played an important role. They have made it possible to attract private and professional investors with interest rates much higher than those of traditional finance. But their future looks increasingly uncertain. A final process is however used by yield farming sites.
Vesting involves blocking rewards for a certain time or distributing them on certain dates. It is already present on the Binance Smart Chain with the Ellipsis site or on the Fantom blockchain with Scarecrow. This process is also used on the decentralized exchange of the Elrond blockchain which opened to the public last week.
As a reward for the staking of EGLD, the native currency of the Elrond blockchain, investors were able to recover the MEX token reward. But this award is locked (locked) for one year. The protocol leaves the choice between rewards that can be resold immediately or double the rewards locked for one year. It is still unclear whether this solution will maintain the price of the token. But it has the merit of having a real incentive effect on the community.
After a real success last spring, the main yield farming tokens are struggling to regain their peaks. This situation looks like the end of an era. That is why it is necessary the alternatives which allow to guarantee their stability. Finally, in the perspective of where you want to best recover the gains from your savings in decentralized finance.