Fluidity is a decentralized protocol that provides wrapped assets to its users, making them eligible to be a participant in a lottery every time they do a transaction. This article will cover the main idea behind Fluidity, its reward mechanism, and why it could be the next big project catalyzing mass crypto adoption in the next era of defi.
Let’s start with some basics.
Yield farming is the action of investing your crypto into a decentralized protocol, hoping for a decent return. For example, Curve Finance is an automated market maker allowing users to swap their tokens with very low fees. The users who deposit their tokens in Curve protocol are called Liquidity Providers {LPs}.
They get a share of all the trading fees collected from the traders depending on the share of their LP tokens. Along with that, the investors can also stake their crypto with a decentralized application to earn annual returns. Currently the rewards on Curve Finance are from anywhere between 3% to all the way up to 32%. This gives users the motivation to invest in decentralized protocols.
Now, the problem is, most of the protocols allow the users to stake or lend crypto but most of the time that crypto is just laying around and not moving. Users are not getting rewarded in any way if they're using that token to make a transaction. That reduces the incentive to use the token for a more general purpose
That's where fluidity comes in. Fluidity is a protocol which rewards its users for using crypto instead of just holding on to them. It works on a mechanism known as “no loss lottery”. This works on a very simple model where the protocol will use the deposited funds to earn interest via other L2 protocols like AAVE or Compound. Now, whatever the interest is being generated during the stipulated time, that amount is being distributed back to the liquidity providers in the form of lotteries.
Your funds are safe and you can withdraw them anytime. Now, it must be noted that, the higher the amount staked in the protocol, the higher the chances of winning it, but the protocol also ensures that malicious actors are not manipulating the smart contract and winning all the lotteries back to back.
Fluidity is a very interesting protocol. It actually motivates its users to make transactions instead of just holding on to them. It creates three major things into the ecosystem.
First of all, there is going to be a massive shift in human behavior where people would be more than willing to pay for a coffee into a crypto than Fiat because by using fluid assets, they have a chance of winning a life-changing reward. It actually exposes the users to more digital products since these days most of the use case of cryptos are limited to digital products and services.
A user can deposit some crypto into the protocol and Fluidity will provide them with a wrapped version of it. For example, if you deposit 100 USDT to fluidity, it would provide you with 100 fUSDT. You can use this fluid USD to transact online and every time you transfer your fluid assets, you would be eligible to win a lottery. Every time I move my fluid assets to buy a coffee or buy a music NFT, I would be eligible for the reward. It is based on the novel idea of Transfer Reward Function. The math behind it is very deep so kindly refer to Fluidity’s White Paper to deep dive into it.
The interesting part is both the sender and the receiver are eligible for the reward. Suppose I win a reward of $1000. So out of that $1,000, the protocol will transfer $800 to my wallet and $200 would be transferred to the receiver’s wallet because the fluidity protocol is trying to incentivize both the sender and the receiver.
Before we get into utility mining, let's understand what is liquidity mining. So liquidity mining is a process in which crypto holders lend assets to a decentralized exchange in return for rewards. Now, these rewards can be in trading fees that are collected from the traders who have been swapping tokens. Now fees average at anywhere between 0.3 to 0.5% per swap and the total reward differs based on one's proportional share in a liquidity pool.
The major issue which comes with liquidity mining is the users have to put their assets in the decentralized exchange but they're not rewarded for doing any transactions. That's where the novel idea pitched by fluidity comes in, which is called “utility mining”. So instead of just providing liquidity through the protocol, the protocol also rewards the user for using it. You have to transact your fluid assets and be an active participant in the ecosystem to win the lottery, rather than just being a passive participant like a Liquidity Provider.
You don't have to provide a large liquidity to the protocol in order to be eligible for that reward. Most of the people in the world live paycheck to paycheck to paycheck and it's not feasible for them to leave their assets idle in an exchange. If they are getting rewarded to just use the currency for their daily tasks, that would be a real growth accelerator.
In the Fluidity Protocol, a significant portion of the tokens in the float will be rewarded through utility mining. Utility Mining will ensure that many users understand the functionality and features of Fluidity as participation is necessitated to receive rewards. Utility Mining facilitates organic liquidity within the ecosystem.
There are many amazing yield generating protocols on Solana like Raydium, Saber and Orca. But none of them carry the reward structure of Fluidity which has a blend of both luck and collateral. While most of the protocols deposit our crypto to provide us with the yield, Fluidity rewards us for every transaction we make using those fluid assets where chances of winning is non-zero.
Curve is a very sophisticated decentralized exchange like Uniswap or Sushiswap, but way more efficient due to which users can transact big amounts of token with very less slippage.
Curve also has a native token called CRV which is issued to the liquidity providers who want to generate passive income. Now the interesting part comes here, those CRV tokens can be staked for a particular amount of time and the protocol will give them the option to vote that is called vote escrowed care tokens or veCRV.
Vote-Escrowed CRV (veCRV) is earned by locking your $CRV tokens for 1-4 years. Longer lock period would result in more veCRV. But why would we need veCRV tokens?
veCRV holders get the 50% of the total exchange fees {rest 50% goes to liquidity providers} and it also holds more voting rights which can be used to direct the future policies of the protocol. Now this thing has created a war between various DAOs where they are bribing users to boost their reward and its kind of profitable for them because for every $1 invested in bribing those veCRV holders, they will earn back $3.15.
I think we might see something like that happening in the future of Fluidity’s governance token where the users having most fluid assets would provide guidance and structure on determining the size and frequency of payouts, the sources of yield and the token distribution policies. It must be noted that Fluidity has a mechanism to avoid Cyclic Transaction Attacks where the user with high funds would not be able to win every time a transaction happens.
This is a detailed thread by Ross Booth on Curve Finance and more aspects of Curve Wars.
https://twitter.com/rossboothr/status/1501648244538953734
Fluidity will use the traditional approach of investing the total deposited amount into yield generating protocols like Compound and Aave to get interest and then rewarding users by a lottery system which is associated with each and every transaction.
Fluidity will incentivize users to participate in specific actions or protocols by rewarding them with a higher expected outcome of receiving a larger dividend payout. A proportion of each reward paid out will be utilised as a fee to contribute to the overall net-benefit of the protocol.
The total supply of Fluid Governance tokens is 1,000,000,000 FLUID tokens, which will be fully circulating no earlier than 4 years post Token Generation Event (TGE.)
The first 25% of the supply will be emitted in 16 months post TGE, 50% after 2.5 years, 75% in 3 years and 100% of fluid tokens would be in supply within 4 years post TGE.
The team also has a very interesting plan on the allocation of total supply after 4 years of issuance.
The aim is to distribute around 25% to the community,
Let’s deep dive into how we can access Fluidity on Solana Devnet:
Go to https://app.solana.beta.fluidity.money/ and connect your Phantom Wallet.
2. If you don’t have Phantom wallet, then download it from here and connect it with Solana Devnet.
3. You can also check out this video for getting some dummy fluid assets for Solana. {They are not real assets, kind of like Monopoly money}
4. After you connect the wallet , it should look like this and you can now swap your test fluid assets.
The fluidity team wants to incentivize its users to stay on the protocol and get a chance to win life changing amount for doing the usual daily transactions, which they do anyway. The whole idea is to reward users for being a participant in the ecosystem rather than being just a spectator.
According to Shahmeer Chaudhry, co-creator of Fluidity, they would be starting with decentralized exchanges on L1s to gain users and visibility. They intend to keep those users for a long period of time by rewarding them both in terms of APY & lottery rewards. The core essence behind Fluidity is that money is not supposed to be kept in a safe, rather we need to let it flow and run its course. And who knows, you might just win a life changing reward because you paid for your coffee using crypto and not Fiat. And that simple change in user behavior is enough to create the next big wave of mass crypto adoption.
wagmi...