What is cash extraction ? | Pros and Cons| Naked Facts

Cash extraction or cash extraction is a feature and strategy of some Decentralized Funding Protocols (DeFi) with which they seek to attract users. This focuses on incentivizing the injection of liquidity into the protocol in exchange for the distribution among users of a series of tokens that provide access to the governance of the project and which can also be exchanged for better rewards or for other crypto-currencies. 

ELterm of liquidity extraction or liquidity extraction , is a strategy by which DeFi Protocols (Decentralized Finance), They seek to capture the attention of users so that they can inject funds into said protocols. This with the intention of receiving rewards in the form of tokens which can be traded on or off the platform, or just hodl of them, and receive better profits with the increase in the value of said received tokens.

Without a doubt, a very interesting way to attract investment and which at the same time completely transformed the DeFi world within Ethereum.

Liquidity Mining, an unconventional form of mining

On the other hand, the extraction of liquidity or the extraction of liquidity is closely related to the agriculture of yield. Yield agriculture is; a strategy that seeks to generate profits by investing in various platforms taking advantage of different market variables. However, we generally speak of liquidity extraction when a DeFi protocol activates a feature that allows its users to receive rewards for depositing and blocking capital on their platform . The rewards are usually received in the form of governance tokens.

These tokens may or may not give the right to vote in the protocol. In addition, they regularly offer access to interest or rewards that are regularly paid to their holders. In this way, the more money they block on the platform, the more tokens they receive and the more rewards they get, thus making higher profits.

The term “Extraction of liquidity” it comes because it is the injection of liquidity. This injection of liquidity by investors allows them to “undermine the governance tokens” which are issued to those who participate in the system. This is, say, the mining mechanism of this platform, and it is again closely related to the concept of staking .

Liquidity Mining, the start of a fever

The liquidity mining fever is fairly recent, in fact many attribute this fact to Composé . It all started June 15, 2020, when Compound released its COMP governance token. At the time, the token came out with a market price of around $ 60 and its market cap was $ 0.

However, Compound already had a large user base and as soon as they started tapping into cash mining everything changed. As of June 20, 2020, the COMP token was worth $ 313 and a capitalization greater than $ 800 million. And not only that, the Total Blocked Value (TVL) or cryptocurrency funds blocked in Compound has reached over $ 511 million, reaching its current high point, with a TVL exceeding $ 900 million.

This clearly tells us that liquidity mining is capable of re-evaluating a platform in a way never seen before, and which has caught the attention of many developers and other DeFi platforms. It didn’t take long for platforms like Balancer, AAVE , and even the same Uniswap  joined the club of platforms with their own tokens and tokenomics focused on extracting liquidity.

Objective of liquidity extraction

Now well Why is liquidity extraction so important on BitcoinMinersHashrate plathform? Well, the answer is quite simple: it is a way to encourage investment and the injection of liquidity into the platform.

Liquidity providers or LPs, by investing in excess, will get rewards for their participation, and usually that rewards are given by a token from that same platform. These tokens are generated according to the protocol’s programming, and are distributed among the liquidity providers as part of their rewards. While most of these tokens are useless outside of the DeFi platform that generates them, the truth is that the creation of trading markets and speculation around these tokens skyrocket their value.

Take the example of Andre Cronje. Cronje comments that the YFI token has no real value, since its utility is simply that of a “governance token”, although the YFI protocol is developed solely and exclusively by it. Basically, this tells us about a token of no real use.

ELterm of liquidity extraction or liquidity extraction , is a strategy by which DeFi Protocols (Decentralized Finance), They seek to capture the attention of users so that they can inject funds into said protocols. This with the intention of receiving rewards in the form of tokens which can be traded on or off the platform, or just hodl of them, and receive better profits with the increase in the value of said received tokens.

Without a doubt, a very interesting way to attract investment and which at the same time completely transformed the DeFi world within Ethereum .

Liquidity Mining, an unconventional form of mining

On the other hand, the extraction of liquidity or the extraction of liquidity is closely related to the agriculture of yield. Yield agriculture is; a strategy that seeks to generate profits by investing in various platforms taking advantage of different market variables. However, we generally speak of liquidity extraction when a DeFi protocol activates a feature that allows its users to receive rewards for depositing and blocking capital on their platform . The rewards are usually received in the form of governance tokens.

These tokens may or may not give the right to vote in the protocol. In addition, they regularly offer access to interest or rewards that are regularly paid to their holders. In this way, the more money they block on the platform, the more tokens they receive and the more rewards they get, thus making higher profits.

The term “Extraction of liquidity” it comes because it is the injection of liquidity. This injection of liquidity by investors allows them to “undermine the governance tokens” which are issued to those who participate in the system. This is, say, the mining mechanism of this platform, and it is again closely related to the concept of staking .

However, Compound already had a large user base and as soon as they started tapping into cash mining everything changed. As of June 20, 2020, the COMP token was worth $ 313 and a capitalization greater than $ 800 million. And not only that, the Total Blocked Value (TVL) or cryptocurrency funds blocked in Compound has reached over $ 511 million, reaching its current high point, with a TVL exceeding $ 900 million.

This clearly tells us that liquidity mining is capable of re-evaluating a platform in a way never seen before, and which has caught the attention of many developers and other DeFi platforms. It didn’t take long for platforms like Balancer , AAVE , and even the same Uniswap  joined the club of platforms with their own tokens and tokenomics focused on extracting liquidity.

However, the community doesn’t see it that way and in fact the YFI token is currently (October 2020) worth $ 13,238, far more than Bitcoin itself. The token even reached over US $ 40, demonstrating the huge fever that exists around these tokens and cash mining. Of course, these YFI tokens are generated and distributed only to those who participate in the system, and there are two purposes of liquidity extraction:

1. Distributing tokens among your investors , thus improving their positions and profits on the platform.
2. Generate an anchor and catch a value . When, given the fact that these tokens have no value, liquidity extraction creates an “entry-exit” relationship associated with an investment given by a liquidity provider. This is what provides minimum value to the token and the rest is done by speculation in the markets.

Pros and Cons of Cash Extraction

If we look at liquidity extraction, we can find the following advantages:

1. First and foremost, it is a tremendous incentive and attraction for investors. Offering rewards for participating in platforms attracts a lot of investor attention, especially if those rewards can mean big profits. So, we have that liquidity extraction platforms tend to suffer huge growth explosions in a very short period of time, due to the high participation of investors.
2. In addition, the growth of the platform generates profits. The mining liquidity platforms can, in a very short time, multiply the investments that are made within the platform. If, in addition, said platform allows the realization of loans that can be invested in the same platform or in another (using yield farming), growth is even more explosive.
3. Most of these protocols are decentralized or have a high degree of decentralization, so that anyone can participate.

However, not everything is so simple, and in the cons section we can find:

1. They are difficult to use and very technical platforms. If a person does not have the basic knowledge of financial tools, he is likely to find himself in a very broad linguistic and technical limbo.
2. Currently, most liquidity mining platforms are rooted in the Ethereum blockchain, and its huge growth (as well as the DeFi ecosystem in general) has pushed the network to its full capacity. Currently, DeFi trading on Ethereum is not cheap at all.
3. On the other hand, if the user does not take into account certain aspects related to the activity, such as spending on commissions, collateral indices, fluctuations of cryptocurrencies in the market, he may end up losing his money.
4. Additionally, liquidity extraction platforms (such as yield farming) are prone to high volatility. In fact, many scholars consider these platforms to behave as “bubble makers” more typical of a central bank hungry for power and money than healthy financial spaces.
5. Finally, we also face the serious issue of smart contract security, which we have seen in the case of yield farming.

Platforms to Leverage Cash Extraction

Among the platforms of excellence to take advantage of liquidity mining, we can mention:

1. Compound , where liquidity providers earn COMP tokens for their participation. These tokens can be traded internally on the platform or exchanges (centralized or decentralized) in order to obtain profits on other different tokens.
2. AAVE , is another project where we can put liquidity extraction into practice, which is possible thanks to a recent protocol update. In fact, with the migration of its old ETHLend token to the new AAVE token, this practice could bring better returns to its holders.
3. Balancer , is a project that recently decided to update its protocol to launch the BAL token, a governance token that allows the extraction of liquidity on its platform.
4. Curve , bases all its operations and profits within its platform on liquidity extraction as well as a decentralized farm yield system applied to the creation of liquidity pools for other protocols (such as Compound or Uniswap) . The intention of this strategy is to maximize profits, since Curve only works with Stablecoins .
5. Uniswap , is the DEX par excellence in the DeFi world. However, recently its development team introduced the UNI token. This is a liquidity extraction token that has led to an explosion in the use of this protocol. In fact, Uniswap currently ranks number one with a Locked-In Value (TVL) of around $ 2.1 billion.
6. aspire to finance , Andre Cronje’s well-known project brings together the best of yield farming and cash extraction in one place. In fact, it is the maximum exponent of the liquidity mining given the surprising value of its token.