Challenges for Retail LPs

Though unintended by any actor, the current phenomenon brings considerable challenges for retail LPs.

Multi-Chain Transition: Choice Overload

The multi-chain transition has overwhelmed LPs with options and additional layers to consider. Additionally, LPs must evaluate multiple layers when making decisions: the network, the bridge, the DeFi application, and the team. Retail LPs struggle to keep up with news and updates, often resulting in missed opportunities. Even after making decisions, LPs have to incur costs for moving their assets. The bridging expenses disproportionately affect retail LPs due to their smaller liquidity scale.

Over-prevalence of Institutional Liquidity: Limited Access

Private negotiations between institutional LPs and protocols limit access to yield opportunities for retail LPs.

Compared to retail liquidity, institutional liquidity has two characteristics: it is larger in volume and more stable due to the signed contracts. The advantages of institutional liquidity grant them significant negotiation power. Protocols often approach institutional liquidity during the early launch phase and promise better reward terms in return for predictable, large-scale liquidity. As a result, institutional LPs benefit from early access and extended rewards.

While these arrangements enable innovations by protocol builders, retail LPs miss out on access to early participation and better reward terms due to their smaller liquidity and lack of negotiation power.

Point Reward System: Decisions Based on Uncertainty

The point reward system allows protocols to offer sufficient reward anticipation for LPs without committing to a fixed token allocation percentage. However, its retrospective nature forces LPs to make decisions based on uncertainty.

In the point reward system, protocols decide on the amount of reward per point and the timing of snapshots after the determining events (e.g., user action, liquidity deposit, etc.) have occurred. Under this retrospective reward scheme, the protocols shift their risk of unpredictability to the LPs. The protocols replace the uncertainty of the amount of bootstrapped liquidity with the ambiguity of profit outcome.

Without clear information upfront, LPs cannot evaluate the exact profit outcome when making the decision to allocate their assets. They have to rely on vague guesses about the profit outcome. LPs suffer from opportunity costs if the yield opportunity turns out to be less lucrative than anticipated.