The Holy Grail of Crypto: Building a Sustainable Liquidity Flywheel (Part 1/2)
The holy grail for any crypto project is crafting a self-sustaining liquidity flywheel. Yet, most projects fail to achieve this elusive goal. Why? Because the conventional logic behind crypto flywheels is often flawed.
Why Most Flywheels Fail
Here’s the typical flywheel narrative:
- Projects create yield in their native token.
- High yields attract significant Total Value Locked (TVL).
- Increased TVL boosts the token’s price.
- A higher token price amplifies rewards, further increasing yields.
- This attracts even more TVL.
While this might sound promising, the mechanism cuts both ways. When token demand falters or sell pressure mounts from rewards, the cycle reverses, resulting in a downward spiral. Moreover, the core assumption — that higher TVL directly drives token valuation — often doesn’t hold. New capital must continually flow into the ecosystem to sustain the flywheel, while constant sell pressure from token rewards erodes its effectiveness.
The deeper issue, however, lies elsewhere: the valuation of the token relative to TVL is often far too high. In most cases, high TVL does not translate into meaningful protocol revenue, making the token’s valuation unsustainable.
The TWIN Finance Difference
At TWIN Finance, we’ve designed a liquidity flywheel with a crucial advantage: a strong, direct relationship between TVL and protocol revenue.
Our protocol earns yield on the collateral users provide to mint “Twin Assets.” This ensures that high TVL generates substantial revenue, creating a foundation for a sustainable flywheel. But the question remains:
How do we convert stablecoin yields into attractive returns for liquidity providers (LPs) in our TWIN Asset pools?
Turning Stablecoin Yields into Attractive LP Yields
If all Twin Assets were paired exclusively with our native stablecoin, TwinHoney, in LP pools, we could theoretically pass collateral yields directly to LPs. However, while the risk profile of providing liquidity for both long and short Twin Assets resembles stablecoin farming, this alone would not attract sufficient TVL. Here’s how we amplify yields to create a compelling opportunity for LPs:
- Berachain’s Proof-of-Liquidity Consensus:
Berachain’s innovative mechanism provides extra yield to liquidity pools. Protocols like ours can bribe validators to direct BGT emissions toward our pools. Importantly, the yield multiplier from these bribes will always exceed 1, ensuring a net positive return compared to direct LP incentives. This results in a meaningful yield boost. - Partnerships with Stablecoin Protocols:
By partnering with stablecoin issuers, we establish pools of Twin Assets paired with their stablecoins. These stablecoin providers, eager to drive adoption, offer incentives and bribes to our pools, further enhancing yields. - DEX Incentives:
Decentralized exchanges (DEXs) compete for liquidity, providing additional incentives to our pools. This creates yet another layer of yield enhancement. - Trading Fees:
Active trading in Twin Asset pools generates trading fees, which LPs earn on top of other rewards, further increasing profitability. - Twin Asset Utility and Demand:
The assumption that all Twin Assets remain locked in LP pools is incorrect. As assets become accessible to investors, they’ll be utilized as investment vehicles or integrated into other DeFi protocols. Our role is to maximize use cases and attract investors. The more assets are held outside LP pools, the higher the yield for remaining LPs. This dynamic not only incentivizes LP participation but also improves market pricing for Twin Assets.
TWIN Protocol Token: No Need for Inflation
One of the key innovations in our model is that we do not need to make our TWIN protocol token inflationary to sustain the flywheel. Instead of relying on printing more tokens to fund rewards, we leverage the yield generated from collateral to buy back TWIN protocol tokens from the market.
This buyback mechanism not only reduces the sell pressure typically associated with token rewards but can even make the TWIN protocol token deflationary over time. A deflationary token model aligns with the interests of token holders and creates a positive feedback loop for token value.
This approach sets TWIN Finance apart from many projects where inflationary tokenomics dilute long-term value. By combining attractive LP yields, sustainable revenue, and token buybacks, we’re able to create a flywheel that drives growth while preserving — and even enhancing — the value of our native token.
Near-Stablecoin Risk, Superior Yields
The ultimate goal of our liquidity flywheel is to offer LPs yields that approach stablecoin farming risk while remaining far more attractive in return. By combining collateral yields, external incentives, trading fees, and organic asset demand, TWIN Finance creates a sustainable flywheel that can attract TVL, generate meaningful revenue, and offer compelling yields for LPs.
The TWIN Finance liquidity flywheel doesn’t just work — it thrives.
Read more in Part 2 shortly. Meanwhile, join TWIN Finance in our socials and check out our Webapp.
About TWIN Finance
TWIN Finance is a groundbreaking DeFi Protocol for derivatives of real-world, crypto, and practically any asset on blockchain. Its distinct long & short “twin-token” method enables the creation of synthetic assets that reflect the price of a real-world asset or crypto equivalent. This method offers high capital efficiency without requiring over-collateralization or exposure to the risk of liquidation. For liquidity providers, this twin-token approach substantially minimizes price risks, bringing them near to stable-coin levels.
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