Liquidity in crypto has a market anomaly by pricing long-term liquidity equal as short-term liquidity and this leads to opportunistic liquidity.

Liquidity in traditional finance

In traditional finance illiquid liquidity is more valuable than liquid liquidity: If you deposit your money for a longer and fixed period, you will receive more interest than if you only keep it as cash in our bank account. For traditional banks this is key, because if people could withdraw their complete money anytime, a bank as a liquidity dependent institution, can go bankrupt very quickly.

Miss-pricing of long-term liquidity vs short-term liquidity

These rules also apply to crypto but have been neglected until now: Most liquidity dependend protocols act like liquidity for a day is the same as liquidity for month and do not reward long-term liquidity over short-term liquidity.
If you deposit your money into a protocol for a week you get the same ratio from the fee, as you will deposit for a month. So cost the move liquidity from one protocol to another is just the transaction cost.

Opportunistic liquidity

Together with the fact that liquidity has the same value regardless of where it is located, this leads to opportunistic liquidity.

Because opportunistic liquidity has only the transaction cost to move from one protocol to another protocol, and except security risk, no other risk. The liquidity can just flow back to the old protocol if not successful. Liquidity wars will only stop if protocols start pricing long-term liquidity higher than short-term liquidity. Leaving with your liquidity and coming back has a price tag then and as a result movement of liquidity will be reduced greatly.

Possible solutions

I see this solutions to give long-term liquidity a higher value than short-term liquidity:

A lock-up period free to choose to immobilize liquidity gets a higer reward (like in legacy banking)
Extra reward for long term provider increasing over time, some form of compounding
Short-term liquidity provider pay long-term liquidity provider on leaving

Real world

Sushiswap vs Uniswap

Sushiswap, a Uninswap fork, startet on August 26 2020 and did implement a basic form of migration mining. Opportunistic liquidity inflow had a value of almost 1.2 Billion $ at the peak. The main dev did cash out the treasurey on September 5 and ruined the project.

https://medium.com/sushiswap/the-sushiswap-project-c4049ea9941e

More about the sushi chef ruining the project: https://twitter.com/ameensol/status/1302395863709351936?s=20

curve.fi vs swerve.fi

Ongoing! (8.9.2020)
https://twitter.com/lawmaster/status/1303221190593581056?s=20

Feedback?

I would like to hear any feedback on this, please use my tweet: https://twitter.com/martinkrung/status/1303307557226917890?s=20

Or drop me a mail at contact@cryptonative.ch or DM me on twitter.