Published 1 week ago • 4 minute read

How Mercenary Capital Ruins DeFi Farming and How Gamification Can Help

The problem of bad actors in the DeFi space is not small. Namely, every business in the industry needs investors — they are required to farm and provide liquidity. However, no one needs them to come in and dump, which is precisely what many have been doing for ages. 

It’s a big problem in the industry, so we wanted to focus more on it in this piece and see what lies beneath. More importantly, we’ll show you how gamification and novel solutions can completely solve the issue for many businesses. 

What Is Mercenary Capital?

Simply put, mercenary capital is a type of opportunistic capital that comes from investors looking to use short-term incentive programs to their benefit. In other words, they want to take advantage of these programs for individual gain. 

In most cases, this type of capital is only temporary, as these investors only consider taking the farm and dump approach. They come in, use up the program's incentives, or simply stay for as long as the rewards cover their profit targets. Afterward, they get out, already looking for another program that will prove even more profitable. 

In the DeFi space, many platforms use these growth hacking programs with incentives that are perfect for mercenary capital. These programs typically come in the form of yield farming and liquidity mining, and they provide added rewards for investors, generally in the form of governance tokens.

In most cases, the programs attract genuine investors, but some of them always prove to be bad actors who only want to take advantage of the rewards in the program without providing the long-term investments the platforms need. 

Big Problem of Mercenary Capital

As stated, mercenary capital is a problem for those projects that have launched growth hacking programs since these rely on long-term capital and actual long-term investors. 

Unfortunately, there isn’t much you can do to dissuade bad actors. Besides the fact that you can’t know what the investor intends to do in advance, you certainly cannot actively discourage others who want to invest out of fear that mercenary capital will ruin your program. 

Not to point fingers here, but the real issue doesn’t actually lie with the bad actors. Yes, they are certainly a part of the problem, but it can only be solved by the incentive program creator modifying their project, not by bad actors suddenly having a change of heart. In other words, you need to create a project and tokenomics that won’t attract bad actors. 

You can’t blame them — they are in it for the profit, and they will always take advantage of a program as long as an opportunity for such a strategy arises. To fix that, you need to remove the opportunity. The way to do that is by incorporating gamification into the program. 

How Can Gamification Solve the Problem of Mercenary Capital?

The good news is that we already have solutions to the mercenary capital problem — it’s just that people don’t know how to solve it.

As we’ve mentioned, the solution lies in gamification. Part of it includes liquidity-locked tokens or LLTs. They are nothing new, as many protocols have already been implementing them. However, this is not enough. You need to effectively distribute a combination of LLTs and underlying protocol tokens in liquidity mining, as this can eventually dissuade the mercenary capital approach. 

Game Theory is the only way to prevent them from farming and dumping. According to this theory, users are empowered to use the investment strategies as they want to, but they are also incentivized to be interdependent.

Aurigami, a protocol that enables its users to lend, borrow, and earn interest through digital assets, has already achieved this through its liquid-locked token called PULP, a representation of its native PLY token. Buyers get to enter long-term positions in PLY through discounts in PULP. At the same time, PULP owners can quickly sell off in exchange for immediate liquidity. Releasing PLY into circulation also helps alleviate some of the sell pressure found in many incentive programs. 

This simplified and elegant approach to LLTs shows that bad actors don’t necessarily have to be a problem. By using this approach that incorporates gamification elements, the problem of mercenary capital can be eliminated, as the system will incentivize intelligent investors who can benefit everyone. 

In other words, such an elegant and simple system will allow the protocol to align long-term interests with users, consequently eliminating bad actor behavior. 

As you can see, it’s clear that gamification can help eradicate the terrible problem of mercenary capital, which has plagued liquidity mining programs for ages. 


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