Liquidity is a term we’re all familiar with in defi; it describes how much cushion a project has to weather buys and sells without severely impacting its price. GOLD1, as we observed in our recent analysis, automatically converts 1% of each interaction with it into liquidity.
However, this is not the norm in crypto; a large majority of coins and tokens are untaxed, which can cause deep liquidity issues over time if they don’t have a value-generating utility or other roadmaps to court long-term investors into parking their funds there (increasing total value locked, or TVL). In some instances, developers have even released additional tokens into their ecosystem disguised as a utility in order to support their trendline with the influx of cash.
In order to understand why healthy liquidity is crucial for any project to thrive long-term, and why GOLD1 is uniquely positioned to avail of this strength, let’s take a cursory look at this crucial market feature and the benefits it provides when in abundance.
Liquidity is the degree to which a firm or investor can quickly add money to, or remove money from, an investment asset without significantly impacting its price.
In crypto, liquidity is commonly measured by the amount of money in a trading pair’s liquidity pool, such as Ether/GOLD1. Generally speaking, holders provide certain amounts of their own tokens/assets to a given pool, in exchange for which they receive slices of fees as a reward for keeping the trades of that pair liquid. This is called liquidity providing (LP). This piece won’t examine pools further, but the basic ideas of how liquidity functions in crypto are important to grasp.
With GOLD1, the liquidity is held in Uniswap and locked, which means it can’t be withdrawn. Additionally, the 1% liquidity tax we looked at earlier ultimately ends up creating an LP token, which is a voucher for the liquidity provided to the pool by the contract tax. This token is automatically burned by the GOLD1 contract, which means it can’t be redeemed. The liquidity itself is locked, and the ability to redeem later added liquidity/LP is also locked, so available liquidity steadily grows over time. This provides tremendous stability to GOLD1.
As of this writing, GOLD1’s market cap is about $4 million with liquidity of about $500k. Quick maths show us a liquidity pool comprising roughly 12.5% of GOLD1’s market cap; an exceptionally strong ratio, especially given how low the market cap still is. You can calculate this ratio for any project you like by dividing the liquidity by the market cap.
As a related aside, market cap simply measures the total value of all coins or tokens in circulation by multiplying coin/token price by the total circulating supply. As we’ve seen, liquidity is an extremely important indicator of stability in a project, so while mid and large market cap projects are assumed to be less volatile and have a proven track record, that’s not necessarily the case, so be diligent in your research.
Stability in the chart is a given benefit. This gives holders and stakers peace of mind as larger buys and sells occur, and it gives swing traders a fairly level playing field upon which to time their entries and exits.
A subtler, yet more powerful benefit is the psychological reassurance it provides, especially to large investors interested in long-term growth.
If a shrewd investor or firm finds great value in a project either for themselves or for their clients/managed accounts, they would look to inject a great deal of capital into it to realize reliable growth. With robust liquidity, they can feel assured that their sum won’t fall prey to sudden market changes or volatility.
Liquidity acts like a landing strip for airplanes; the larger the liquidity, the bigger and greater the number of planes it can host as they land or take off.
Let’s consider a brief thought experiment to illustrate these points.
Token A has a $45m market cap, 1 billion in supply, and no tax. Its liquidity is $1.2m (2.7%). If a top wallet holding 34m tokens (3.4% of supply, worth $1.5m) sells off entirely, they only receive around $445k due to the price impact of their sale tanking the price by 70%. The liquidity is entirely too small, large investors lose out on their dues, and small investors lose with a massively reduced price for their bags.
GOLD1 has a 1% max wallet size and the aforementioned $4m market cap with around $500k liquidity (12.5%). If a max bag sells 100m GOLD1 (worth $40k), they would receive roughly $35k after the price impact of about 15%. The liquidity buffers the sale, and 1% of it goes right back into liquidity (stakers enjoy their 0.9% share of that sale as well).
With GOLD1, the liquidity only gets stronger over time via the 1% volume-based tax, as we’re already seeing, which instills the comfort that it won’t run into liquidity issues down the line as it grows.
As the other rings of the golden ecosystem come online and begin to feed additional value into the Gold Mine for stakers, we should look forward to the attention they will attract as the DAO consistently grows its ability to fund public good and deliver rewards.
Once the Golden DAO acquires projects and invests in a portfolio of decentralized assets in the future, that will greatly impact GOLD1 volume.
Some acquired projects may utilize GOLD1 in their utility service, immediately contributing to liquidity and the Gold Mine. As new investors seek to buy into the golden ecosystem to enjoy the passive income those ventures provide, and as current investors take some profit as the price appreciates, liquidity and the Gold Mine are fed yet again.
With nearly 65% of the supply staked and counting, GOLD1 will continue to experience a supply crunch and increased demand for access to the benefits it provides.
This cycle will rapidly increase liquidity alongside rewards for stakers, further inspiring rich confidence in GOLD1 as a vehicle for sustainable and well-founded growth.