Deep dive is my research on specific crypto projects.
Investment thesis
Lifinity has the potential to become the dominant decentralized exchange (DEX) on Solana given its best-in-class automated market maker (AMM) design that maximizes profit for LPs and minimizes spreads for users.
What is Lifinity?
Lifinity (short for “infinite liquidity”) is the first proactive market maker on Solana designed to improve capital efficiency and reduce impermanent loss (IL). It gives regular people access to automated market making strategies, and the ability to earn a sustainable yield without specialized knowledge.
The problem
Trading is a core primitive, with Binance and FTX having become giants in the crypto industry. With regulation on the rise, we can expect decentralized trading volume to grow over time. But since the launch of Uniswap, DEX has become an increasingly competitive segment, so how does Lifinity differentiate itself from the pack?
The solution
Enter Lifinity's best-in-class AMM design, which combines Uniswap V3 concentrated market making with oracle-based pricing (using Pyth).
That's a mouth-full but basically, by not having to rely on arbitrageurs to adjust prices, Lifinity's AMM design enables the concentration of LP funds (typically up to 100x vs. constant product AMM) whilst minimizing the risk of IL.
Lifinity automates the selection of concentrated liquidity ranges for LPs via algorithm, and aims to reduce IL by using an oracle to determine the "right" price. This is unlike Uniswap V3, which uses its internal pool balance to determine price. Combined, this allows Lifinity to offer competitive spreads for users while generating profit for LPs from both trading fees and market making (buy low, sell high).
The execution
Lifinity's main pool (SOL-USDC) has been live since 17 February 2022. As of 20 June 2022, the pool has generated 66% APR for its LPs, with no liquidity mining program. On top of earning 54% APR from trading fees, the protocol also made 12% APR in market making profit. That's right, instead of incurring impermanent loss, the protocol actually made a slight profit by market making.
On the user end, despite having a TVL that is 1.5-3.0% of its competitors (e.g. Orca, Raydium, Saber), Lifinity consistently ranks in the top 5 by trading volume on Jupiter, the dominant aggregator on Solana.
Continued innovation
Most importantly, the Lifinity team continues to ship improvements in an effort to optimize trading volume and revenue:
Lifinity's tested running 10,000-30,000x concentrated liquidity on its USDC-USDT pool, which forced Saber (the leading stableswap DEX on Solana) to reduce fees on its pool to zero to compete,
Lifinity is moving to a volatility-adjusted fee model, which automatically charges a higher fee during periods of higher volatility, in order to further optimize trading revenue and minimize IL,
Lifinity is launching Market Making as a Service (MMaaS) and Liquidity as a Service (LaaS), giving other projects the option to provide assets to Lifinity for market making, or have Lifinity provide the liquidity for another project to market make in exchange for compensation. For any project needing liquidity for its native token, Lifinity’s MMaaS and LaaS are more cost effective compared to traditional liquidity mining on CPMMs and CLMMs, where sizeable rewards are often mercenarily farmed and dumped.
Funding / valuation
Lifinity has no token allocation for VCs.
In December 2021, Lifinity raised 15,000 SOL via a NFT mint, successfully bootstrapping liquidity for its first pool (SOL-USDC) for testing.
In March 2022, Lifinity raised $9.6m via an IDO, selling 20% of total supply. The IDO valued Lifinity at $84m FDV and $34m allocated token market cap. However, 72% of the IDO participants chose to lock their LFNTY tokens for 4 years, receiving a 50% discount on the price paid (or $0.42). Given this, the effective FDV and market cap at IDO is closer to $42m and $17m respectively for most investors.
At a time when the price of most projects have fallen >90% from all-time-high, $LFNTY continues to trade close to its effective IDO price.
LFNTY token
Lifinity has a token-economic design that maximizes value accrual to LFNTY holders. All protocol revenue (trading fees and market making profit) are distributed directly and indirectly to LFNTY token holders:
50% of the revenue is distributed to veLFNTY holders in the form of token rewards (SOL, ETH, USDC),
the remaining 50% of the revenue is used to buy back LFNTY as appropriate.
The community
Lifinity has attracted 13.5k followers on CT and 9k "Liffies" on discord. The team is clear and transparent in its communication, providing weekly updates, AMAs and ad-hoc updates when material events arise.
Key risks
Betting on LFNTY is first and foremost a leveraged bet on the success of the Solana ecosystem. For the foreseeable future, Lifinity is solely focused on building on Solana, for Solana users.
Lifinity relies on Pyth for pricing and oracle failure can lead to losses if trading is not halted by the team quickly. In the future, Pyth charging too much for access to its data can also affect profitability.
It remains to be seen whether the success of Lifinity's SOL-USDC pool can be replicated for other pools. Despite having raised $9.6m in March 2022, the current TVL on the platform is ~$3.4m, suggesting that further testing is being done before more capital can be profitably deployed.
Lifinity is focused on maximizing profit per LP token by design. For each pool, there is an optimal level of liquidity (target liquidity), beyond which profit per LP token begins to decrease. This can act as an artificial constraint on the price of LFNTY as more capital invested in LFNTY can put downward pressure on the yield earned by all LFNTY holders, in the same way an increase in TVL decreases yield for liquidity miners.
Closing thoughts
While Uniswap should be celebrated as a 0 to 1 moment for decentralized trading, we can equally acknowledge that the constant product AMM model is only the beginning. Lifinity’s AMM design is unique in its efforts to maximize profit and capital efficiency for LPs while offering competitive spreads for users. Doing away with mercenary liquidity mining, Lifinity offers us a glimpse into the future of sustainable DeFi.
Disclosure
I have a 2.5% allocation to LFNTY in my crypto investment portfolio.
Further reading
Contact me
Twitter: EtherKai (@btc21m)
Email: kai.btc21m@gmail.com
About Kai
Bought the 2017 top, fell down the crypto rabbit hole in 2020, full-time Magical Internet Money HODLer & user since.
Prior: a decade in TradFi (renewables/investment banking/capital markets).
Thank you
@Lifinity_io @durdenwannabe
Disclaimer
This memo is presented for informational and entertainment purposes only and does not constitute financial advice. Individuals have unique circumstances, goals and risk tolerances, so please do your own research before making investment decisions.