APY 248.04% - Why are the Liquidity Mining APYs so High?

The screenshot above is from Cake Defi, but there are other places with high APYs as well such as Pancake Swap and Bakery Swap. You can see the theme here.

The high payment implies a liquidity shortage. The next logical question is why? Why is there a liquidity shortage?

Is there a high risk to providing liquidity or is there just no availability of tokens to provide the liquidity? Are there just not enough tokens in circulation? Should tokens be printed at a steady rate or should the supply be more dynamic?

If this is driven by risk, then what are the risk? If the smart contracts are well written then the theory is that a lot of the risk should be eliminated. In theory smart contracts should have less risk than the contracts written by lawyers in our current legal system. If there is less risk than the risk premium should be lower and not higher. What risk still persist? What risk can smart contract eliminate and what risk can't be eliminated by smart contracts?

What about demand? Is demand increasing and if so, why is it increasing? Are people exchanging tokens for different types to look for arbitrage? Is that the driver of conversion volume? In "efficient markets" there are no arbitrage opportunities.

Does the explosion and sheer number of coins, DeFis, and investment opportunities make it harder to do comparison shopping? In Economics, the classic example for this is in car dealerships. If car dealerships are competing against each other then why do they locate so close to each other? The classical answer has always been that geographical "centralization" reduces information cost to the buyer and this makes the market more efficient for both the buyer and seller.

If many of the currencies don't survive then there would be fewer exchange pairs and less need for liquidity. It would be easier to assess the investment environment which would improve information transparency and eliminate arbitrage that is related to "asymmetric information".

In business you do see some centralization and in some cases they do lead to better outcomes for the ecosystem as a whole. They lead to lower prices and better services. In many cases centralization leads to worse outcomes. The key is to examine each market or problem on a case by case basis and ask the question out loud. Is the problem that we need to solve better handle by centralization or decentralization? The answer is usually some where in between.

Are people actually "spending" these tokens and therefore are forced to convert because the good or service that they want to pay for requires that they have that token? Does the increase in conversion cost driven by the sheer number of exchange pairs offset the advantages? There are advantages that come with decentralization such as more autonomy, security, less wealth inequality, etc...

Is some of this driven by HODLing, institutional investment, or wealth consolidation? I saved the most important question for last. Why all the baked goods or cake themed DeFi?

Please don't take anything that I have written above as a position. I don't try to gain anything financially by attacking people and I don't want to promote that type of environment. These are open questions. There are a lot of grey areas. This is a place for diverse opinions. Diversity is form of decentralization.

The answers will play out in the market and some type of equilibrium will probably prevail. Not that there aren't games in game theory with multiple equilibria. I am just curious about the thoughts of the community.

Posted Using LeoFinance ^Beta