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Chapter 6 - Yield Types: APY, Points and the Promise of Future Tokens

Annual Percentage Yield (APY)​

APY is one part of the reward scheme that EOL offers to users contributing to the liquidity collective. Mitosis EOL can negotiate higher APYs compared to individual LPs, enhancing returns and reducing opportunity costs through collective bargaining power.

Points and Future Tokens: A Double-Edged Sword​

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The point reward system has become a popular tool for attracting liquidity, with protocols offering points instead of immediate yield, promising future token allocations. Often, protocols pledge a fixed percentage of their total token supply as rewards. For instance, a protocol might offer 10% of all tokens to LPs. This approach, however, carries risks:

Underfunding scenario: If a protocol targeting $10 million in liquidity only receives $1 million, it still distributes 10% of its tokens, inefficiently using this valuable resource for less liquidity than intended.

Overfunding scenario: A protocol receiving more liquidity than expected may lack sufficient tokens to reward all participants sustainably, potentially leading to diluted rewards or unsustainable token distribution.

This method can lead to either underutilization of tokens or over incentivization, both of which can be detrimental to the protocol's long-term health. Protocols need to carefully balance their token distribution to align with actual liquidity needs and ensure sustainable growth.

Conversely, not committing to a percentage for token allocation fails to generate profit expectations for LPs, potentially resulting in insufficient liquidity supply. However, protocols must also be cautious of over incentivization. For instance, if a protocol offers 1 token per USDC and only needs 100 tokens worth of liquidity, but attracts 10,000 USDC, it may end up over-rewarding early participants. This can lead to unsustainable growth, as the protocol exhausts its token supply too quickly, potentially causing a sharp drop in rewards and subsequent liquidity flight once the initial high incentives period ends.