What Is Mercenary Capital?
Mercenary capital refers to opportunistic investment provided by investors who seek short-term gains through incentive programs offered by a platform.
This type of capital is often temporary as investors withdraw their funds once they find more profitable opportunities or when the rewards provided by the program decrease below their desired targets.
Boosting Participation
To incentivize small to medium-sized investors, many Automated Market Maker (AMM) platforms conduct growth hacking programs such as liquidity mining and yield farming.
These programs offer additional rewards, often in governance or native tokens, to liquidity providers (LPs) who stake or lock their LP tokens.
These rewards vary depending on the project but historically have been attractive enough to attract more investors.
Navigating Challenges
However, platforms implementing such programs are susceptible to the negative effects of mercenary capital, even with lock-in time periods.
This is particularly true when programs provide excessive short-term rewards that benefit opportunistic investors rather than community members and long-term investors.
Addressing Liquidity Crunch
Other factors, such as limited time periods or temporary bonuses for growth hacking programs, can amplify the negative impact of mercenary capital.
When the program ends, there is an increase in selling pressure as mercenary capital providers withdraw their liquidity to sell off their rewards.
This can result in significant price drops for the reward tokens and may trigger panic selling by other investors.
Mitigating Mercenary Capital
While this issue is faced by all platforms employing growth hacking programs, it can hinder the long-term development of the platform.
Measures such as longer lock-in staking periods for increased rewards can be implemented, but effectively dealing with mercenary capital requires a combination of good tokenomics, excellent products, and strong community trust.