Hassan Maishera
A crypto network is only as good as its liquidity. No matter how high the throughput or how appealing the dapps, if there isn’t liquidity, there’s no reason to stick around. Deep liquidity isn’t just about letting whales execute whale-sized trades onchain: it’s about enabling all users to make swaps without slippage to trade assets at market rates.
Unfortunately for DeFi users, the rapid expansion of the multi-chain landscape has caused fragmentation, scattering traders and their precious liquidity across hundreds of L1 and L2 networks. While improved bridges and data protocols have made it easier to move assets between chains, networks are still largely reliant on the liquidity available on their native chain.
Solving this problem has called for the industry’s brightest minds, who’ve tackled the challenge from different angles. While liquidity still remains fragmented across the multi-chain landscape, there are now solutions in place to reunite it, allowing users to execute capital-efficient trades – regardless of which chain they’re on.
The Case for Deepening DeFi Liquidity
The desire for deep onchain liquidity is about more than mere capital efficiency. Yes, traders want to execute swaps without losing out due to slippage, but liquidity is indicative of more than merely pricing. It's also desirable because its abundance denotes a ready supply of makers which in turn means long-term users who are committed to supporting the network.
While blockchain developers have certain tools at their disposal to deepen liquidity, such as incentivized liquidity mining programs, they can’t just give out tokens indefinitely. At some stage, when LP rewards taper off, there need to be alternative means of maintaining healthy liquidity. Otherwise, LPs will simply take their assets to other chains where the yield is greater.
So far, a number of solutions have been developed to reduce liquidity fragmentation. DEX aggregators such as 1inch have been successful in uniting disparate liquidity pools on a single blockchain. Cross-chain swapping protocols such as Swing have also developed aggregators that route trades to other networks in search of better pricing. Such tools have helped to improve available liquidity, but have been unable to keep pace with the flight of LPs to emerging networks where more profitable opportunities often lie.
Mercifully, newer solutions are now coming onstream that take a radically different approach to deepening DeFi liquidity. By procuring liquidity from multiple sources, both centralized and decentralized, they’re able to supercharge onchain liquidity.
Rise of the Liquidity Layers
Lumia is part of a new breed of liquidity providers that aggregate onchain liquidity through a purpose-built network or “liquidity layer.” Its Lumia Stream protocol aggregates liquidity from CEX and DEX alike, delivering an onchain liquidity solution that solves the slippage problem on illiquid chains. It can be regarded as the evolution of the DEX aggregator, concentrating liquidity where it’s needed when it’s needed.
At the heart of Lumia’s technology is the DNLP (Delta Neutral Liquidity Provisioning) system. This decentralized liquidity infra serves as the core engine of Lumia Stream and is built into the Lumia L2. DNLP nodes provide a means of decentralizing liquidity – even when it’s procured from CEXs. On Lumia, DNLPs consolidate liquidity from multiple CEXs into a single source.
One of the novel things about Lumia is the utilization of Node Owned Liquidity (NOL) for Data Availability Committee (DAC) nodes. These nodes receive LUMIA tokens as rewards upfront, with tokens then vesting over time proportional to their uptime in support of Lumia Stream.
NLP and DAC nodes are overseen by HyperNodes, which are the entry points for users wishing to contribute to Lumia’s liquidity network and earn rewards. HyperNode operators control the rights to multiple Lumia VMs and play a role in making the network more decentralized and impervious to attack. As an added incentive for node runners, Lumia provides Delta Neutral Liquidity Provisioning (DNLP) which allows yields to be topped up through things such as restaking and yield farming.
The Future of Onchain Liquidity
It will be a while before the majority of L1 and L2 networks have integrated solutions that effectively deepen liquidity. But make no mistake, the tech is now here and is being used by networks that appreciate their liquidity as their lifeblood. DEX aggregators, cross-chain swap protocols, and omnichain bridges have moved the needle in the right direction. And the emergence of liquidity layers such as Lumia has finished the job.
One thing that’s clear is the future of onchain liquidity, just like the future of DeFi itself, is modular. It’s a world composed of interoperable open-source protocols that work together to provide a harmonious user experience. This modular approach is embodied by Lumia, whose liquidity layer is formed of distinct components that complement one another and a decentralized network of nodes run by independent operators. The incorporation of long-term incentive mechanisms, through Delta Neutral Liquidity Provisioning, also ensures ongoing liquidity.
This framework is likely to be adopted by other liquidity layers aiming to draw liquidity from an array of sources and deliver it onchain. As for DEXs launching on L2s today, the tricky problem of bootstrapping liquidity has been solved. Thanks to cross-chain liquidity protocols that can now be easily integrated, it’s possible to go live with deep liquidity from day one.
Liquidity remains one of the greatest challenges faced by blockchain network architects. But with viable solutions now readily available, there may come a time when deep liquidity comes as standard on every chain.
