Determining the Liquidity Strength Industry Standard: A Deep Dive into Sustainable DeFi Growth

ApeBond
5 min readFeb 21, 2024

In the burgeoning realm of DeFi, liquidity strength has emerged as a pivotal factor in determining the sustainability and growth trajectory of projects. ApeBond, through meticulous research and dexonomic analysis, has established a benchmark for liquidity strength, providing a navigational tool for projects in the DeFi space.

Unveiling the Liquidity Strength Industry Standard

After evaluating on-chain data from over 1500+ DeFi projects for nearly two years, ApeBond’s dexonomic experts have formulated a liquidity strength industry standard. This standard is defined as a benchmark ratio between the depth of liquidity a project maintains on a Decentralized Exchange (DEX) and its market cap. The results, depicted in a detailed graph, demarcate a ‘sustainable zone’ that highlights the liquidity needs based on market cap, providing a visual guide for projects to gauge their liquidity strength.

The Imperative of Achieving Liquidity Strength

Projects should strive to meet, or ideally exceed, the industry standard (marked by the sustainable green line on our graph) to fortify their position in the market. Achieving optimal liquidity strength is not merely a milestone but a strategic move to:

  • Enhance Mid & Long-Term Growth: Ensuring on-chain liquidity aligns with market cap fosters a conducive environment for sustained growth and development.
  • Price Stability: Adequate liquidity buffers against drastic price fluctuations, ensuring stability even amidst market volatility.
  • Build Resilience: Especially crucial during bear markets, robust liquidity strength safeguards against negative impacts and ensures user acquisition doesn’t become a prohibitively expensive experience.

Liquidity Debt: A Conceptual Framework

The concept of ‘liquidity debt’ is introduced to describe liquidity strength that falls below the sustainability line, indicating a deficit in the value of liquidity required to achieve financial sustainability. This ‘debt’ underscores a fiduciary obligation towards token holders, ensuring a stable and reliable trading environment by mitigating risks associated with price and LP values being overexposed to unfavorable market events.

The Dual Facet of Liquidity Strength

1. DEX Liquidity: A Balance of Depth and Market Cap

Defining DEX Liquidity: Liquidity is the lifeblood of assets. Essentially, more DEX liquidity deepens the ease with which a token can be converted to another digital asset without significantly impacting its price.

Significance of Deep Liquidity Relative to Market Cap:

  • Attracting New Buyers: Adequate liquidity minimizes price impact/slippage, encouraging new and existing supporters to engage in purchasing, thereby fueling growth.
  • Shielding Against Sell-Offs: A healthy liquidity profile discourages rapid sell-offs by minimizing price impact and slippage, thereby preventing a cascade of sales that could plummet the token’s price and trigger a detrimental spiral towards devaluation.

In essence, maintaining good liquidity strength not only makes a project attractive but also resilient, while its absence can spell disaster, especially in a volatile market.

2. Inflation: A Delicate Balancing Act

  • Understanding Inflation in DeFi: Emitting treasury tokens into circulating supply must be judiciously managed to prevent the inflationary pitfalls that are common in the crypto industry.
  • Navigating Through Bear Markets: In scenarios where demand plummets, such as bear markets, managing supply becomes crucial to prevent the token value from tanking.
  • Prudent Treasury Management: Ensuring that tokens are not spent frivolously is vital to prevent unnecessary inflation and to safeguard the treasury’s value.

In conclusion, the liquidity strength industry standard serves as a beacon for DeFi projects to navigate through the intricate dynamics of liquidity management and inflation control. By adhering to these standards and diligently managing liquidity and inflation, projects can fortify their position, ensuring sustainable growth and stability in the ever-evolving DeFi landscape.

Liquidity Health Dashboard: Visualization & Real-Time Insights

Time is of the essence in this space, for both projects and users. Therefore, having a data visualization tool that can provide insights into the decentralized liquidity profile and sustainability of crypto projects is of paramount importance. The Liquidity Health Dashboard by ApeBond aims to bridge the gap between users’ lack of time for researching projects and the general lack of education about the importance of the theoretical concepts previously discussed. This first-ever industry-wide credentialing system can be understood at a glance, with its aggregate score ranging from 0 to 100, where a higher score indicates better Liquidity Health and sustainability.

Understanding the 3 components

1. Liquidity Strength: Available Liquidity vs Market Cap

Liquidity Strength (LS) measures the ratio between the available liquidity of a token compared to its market capitalization. This is calculated by dividing a project’s total valid extractable liquidity (the sum of the hard assets in all valid liquidity pairs across all pools) by the project’s market capitalization (the circulating supply of the token multiplied by the spot price of the token). This metric is designed to look at if a project is maintaining enough liquidity compared to how large the market for the project’s token is.

In other words: is there enough capital backing the token you are holding, or are you holding an empty bag that you cannot actually liquidate because the token is illiquid?

2. Liquidity Ownership: Actual Token Liquidity Owned vs Preferred Token Liquidity Owned

Liquidity Ownership (LO) measures the ratio between the amount of token liquidity that a project owns compared to the amount of liquidity a project should own. Owned liquidity is more reliable than rented liquidity as it doesn’t depend on constant incentives.This metric is designed to look at a project’s Liquidity Debt: the difference between a project’s owned, extractable liquidity and a baseline level of sustainable liquidity.

In other words, LO looks to answer the following question: Does this project own ample liquidity to back the token based on its MCAP?

3. Liquidity Concentration: Concentrated Liquidity vs Scattered Liquidity

Liquidity Concentration (LC) measures the degree to which the liquidity for a project’s token is concentrated to a certain number of liquidity pools. This metric is simple — the fewer pools you have scattered across the blockchain, the more concentrated your liquidity is and the more accessible that liquidity will be with lower slippage and price impact when trading.

In other words, LC looks to answer the following question: Is this project’s liquidity too spread out?

Closing Thoughts: Theory vs Actuality in the Space

The importance of crucial terms such as Liquidity Strength, Liquidity Debt, and an overall understanding of the fundamentals behind Inflation in DeFi will most definitely be of help to both projects and users in creating a more Sustainable DeFi Growth. By intertwining these concepts with the data showcased by the Liquidity Health Dashboard, answers to the following questions can be provided: What Does An Ideal Project Look Like?

This title can be attributed to a project that has enough liquidity to capitalize their token without leveraging emissions to rent liquidity, valid pairs that have at least $250k of extractable liquidity across each of their liquidity pools, and all the Protocol Owned Liquidity would be locked in a contract or gnosis safe.

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