Innovations that push boundaries tend to generate buzz before they’re fully adopted by the broader DeFi community. Protocol Monetary Trade Policy is the newest one on the horizon. It’s already considered by some as the evolution of liquidity mining, despite being relatively new in the space.
The policy’s proponents say it will greatly benefit the DeFi ecosystem, but it’s worth examining exactly what Protocol Monetary Trade Policy is, how it compares to traditional DeFi economics, and whether it truly has the potential to revolutionize the crypto-economic space.
What is Protocol Monetary Trade Policy?
Protocol Monetary Trade Policy (PMTP) is a set of monetary policies that use a cryptocurrency protocol’s influence over currency trade or transfers to support the health of the protocol and its core token(s). In theory, it may eventually eliminate the need for inflation. The policy was invented by a team of crypto economists at Sifchain.
One of the main goals of Protocol Monetary Trade Policies is to help attract external liquidity while increasing total value locked (TVL). It does this by incentivizing a cryptocurrency token such as ROWAN, creating an attractive option to earn rewards in. In turn, this helps to drive external demand to pool assets and encourage the purchase and staking/holding of the specified token.
“Sifchain sees Protocol Monetary Trade Policy as an innovative suite of tools that can provide flexible & powerful utility alongside other features, like margin trading. These policies would allow DAO governance to decide on how to move these various monetary policy levers, which would provide immense value to both traders and liquidity providers.
So far, Sifchain has introduced one of these policies in pool Ratio Shifting. In the future, others can be introduced, but ultimately, the future of the protocol and how these various levers are enabled/disabled/used is in the hands of our community through the DAO voting structure.”
Says Sifchain’s Head of Business Development, Casey Arrington. But how exactly does Protocol Monetary Trade Policy differentiate itself from other economic models?
How Protocol Monetary Trade Policy differs from traditional DeFi economics
A typical decentralized exchange (DEX) has at least one liquidity pool that allows users to swap crypto assets. It uses an automated market maker (AMM) algorithm to maintain fair market value for exchanging token pairs.
Let’s take a liquidity pool with tokens A and…
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