By the end of 2018, many crypto skeptics had their “I told you so” moment, as many initial coin offerings, or ICOs, failed to deliver on their promises. Between 2017 and 2018, 3,250 projects were launched via ICO and $21.4 billion was collected from investors. But by early 2018, a study revealed that nearly half of 2017’s ICOs had failed — with another 13% considered “semi-failed” — dealing financial blows to coin purchasers anticipating gains. Many projects achieved very high returns initially, only to see coin values fall precipitously thereafter.
It’s important to note that many other ICOs were successful, launching projects that are still thriving today (Chainlink being one such stalwart example). Despite the successes, however, investors have been hesitant to forget the less fortunate tales — over the past couple of years, ICOs have slowed to a trickle.
Perhaps skeptics celebrated a bit prematurely. While ICOs may not have proven to be the optimal funding mechanism for decentralized projects, the fundamental promise behind these innovations remains. Innovations continue, and a new methodology for bootstrapping — liquidity mining — has moved in to fill the gap.
Related: DeFi liquidity pools, explained
In liquidity mining, a project offers its tokens to anyone willing to deposit their funds into a smart contract. Let’s look at a hypothetical example: “Cranberry Finance” offers the liquidity provider token “Cranberry Coins” to any user who deposits Cranberry and Ether (ETH) on Uniswap. In addition to earning fees collected from each trade between Cranberry and ETH on Uniswap, everyone who stakes their liquidity provider tokens in a smart contract can earn more coins from the project. Depending on the price of Cranberry Coins, the rate of Cranberry rewards, and the amount of liquidity provided, the annualized returns from liquidity mining programs can range from…