Liquidity, Incentive and Game Theory

Liquidity Dependence and Imbalance in Incentive Mechanisms

Current mainstream DeFi protocols (such as DEXs and lending platforms) rely on external liquidity providers (LPs) to participate in liquidity pools to maintain operations. To incentivize participation, these protocols often offer high token rewards, resulting in the following issues:

• "Mine, Withdraw, Sell" cycle: Speculators enter, mine tokens, and immediately sell them, causing the token price to rapidly decline and creating a death spiral.

• Liquidity fragility: Once incentives are withdrawn, TVL drops sharply, and the protocol loses its market function.

• Unsustainable returns: Continuously subsidizing liquidity through inflationary rewards fails to maintain long-term healthy growth.

OpenFi introduces the Protocol-Owned Liquidity (POL) model, which actively controls its own liquidity sources, transforming "rented liquidity" into "owned liquidity" and significantly improving system resilience and capital efficiency.

The Game Theory Between Users and Protocols

In traditional DeFi models, the relationship between the protocol and users is fragile and adversarial. Users view the protocol as a "profit machine," while protocols worry about users exiting for short-term arbitrage, and the two sides lack a true win-win foundation:

• Short-term behavior dominates: Users focus on immediate returns and lack long-term commitment, forcing the protocol to continuously offer high rewards.

• Incentive design is disjointed: There is a disconnect between rewards and contributions, with both real participants and speculators receiving the same returns.

• Frequent trust crises: Once the token price crashes, TVL disappears, and the protocol’s value vanishes.

OpenFi leverages game theory to design the (3,3) strategy model, encouraging users to "win with the protocol" through staking and bond purchasing. Through high-frequency compounding and tiered incentives, OpenFi builds a long-term holding logic, transforming users into true "stakeholders" of the protocol.