DeFi Projects Shift Towards 'Protocol-Owned Liquidity' to Cut Slippage and Emissions

DeFi projects are shifting away from renting liquidity and towards buying and running their own LP positions. This shift has been dubbed 'protocol-owned liquidity' or POL.

POL involves a project using its treasury or revenue to seed and own market-making inventory on decentralized exchanges (DEXs). By doing so, protocols can cut slippage, reduce ongoing emissions, align incentives, and keep liquidity live through rough markets.

There are several benefits to POL. For one, it allows projects to 'own the spread' by keeping consistent depth where users trade most actively. It also enables teams to 'spend once, manage forever', reducing long-term costs compared to perpetual farming. Additionally, protocols can 'align incentives' by benefiting from fees and tighter execution.

However, there are some challenges associated with POL. For one, it requires active risk and inventory management. This can be time-consuming and may not be feasible for all projects. Furthermore, teams must weigh the trade-offs between renting liquidity versus owning their own LP positions.