Mercenary capital refers to the opportunistic capital provided by investors seeking to take advantage of the short-term incentive programs conducted by a platform for individual gain.
Mercenary capital refers to the opportunistic capital provided by investors seeking to take advantage of the short-term incentive programs conducted by a platform for individual gain. It is often short-lived or temporary as these investors often withdraw their capital once they find more profitable programs, or when the rewards provided diminish below their desired targets.
To incentivize small to medium size investors, many AMM platforms conduct a growth hacking program, called liquidity mining and yield farming. Simply put, the program provides extra rewards (often in the form of governance or native tokens to the platform) to liquidity providers (LPs) if the LPs decide to stake or lock in their LP tokens. These rewards vary greatly depending on the projects’ decision, but have historically been attractive enough to attract more investors.
However, platforms implementing such programs are also vulnerable to mercenary capital even with lock-in time periods. This is especially so when the programs provide excessive short-term rewards that benefit opportunists instead of community members and long-term investors.
Other factors, such as a limited time period or temporary bonus for the growth hacking programs, may also increase the negative impact of mercenary capital. When the program ends, short-term selling pressure increases as the mercenary capital providers withdraw their liquidity to sell off their rewards. This results in significant price drops of the reward tokens and might create a chain effect from panic selling by other investors.
While this is an issue all platforms employing growth hacking programs eventually face, it can be crippling to the long-term development of the platform. Measures such as longer lock-in staking periods for more rewards can be employed, but dealing with mercenary capital ultimately boils down to a combination of good tokenomics, excellent products, and strong community trust.
Author Bio: Hisham Khan, CEO of Aldrin
Hisham Khan comes from a decade-long background in managing and building robust and innovative financial and enterprise technology. With an extensive career at Bloomberg and based in New York, Hisham has worked as a project manager with some of the world’s top engineers. It was here where he discovered the transformative impact of cryptocurrencies, and has since left Bloomberg to build comprehensive and accessible trading tools through Aldrin. His core mission is to make advanced crypto trading and strategy development available for everyone.
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