A better liquidity baking

Hi there,

I am a noone and I am already assuming this will be completely ignored, in any case, I will share some thoughts with you all and it would be much appreciated if I had some feedback.

I had an Idea, instead of giving incentives to private liquidity providers, a public account owned by the protocol itself could provide liquidity to a asset pair, be it tzBtc kUSD or others.

This is how it would work:

Of the 2.5tez minted every block, half is sold for tzBTC and the other half is added to the liquidity pool together with the freshly bought btc.

The trading fees go to the pool and this way it keeps growing.

Since there are no private actors that can withdraw the liquidity, liquidity will only increase.

Then it would be great if we could use the liquidity in the pool to fund development using a dao and voting over different funding proposals, otherwise there would be an ever increasing pool of liquidity with no owner.

This has the clear downside of growing the liquidity very slowly while the LB proposed in Granada would jumpstart the liquidity instantly.

The upside I see on my Idea is that the subsidy does not have to be continuous, even with only two years of subsidy there would be already around 1M of tez + 1k BTC or the equivalent in other assets and noone can withdraw it.

I know I might sound amateur but please do me a favor and tell me why it is a bad idea. Thank you

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Hi!
Where is it supposed to sell xtz for tzBTC if no one LPs?
Why do you think it’s a bad idea to give incentives to liquidity providers?

I don’t understand why you want to mix a dao/funding with it

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It would need a small seed pool and then it would sell to himself, but now that I think it its the same effect as adding the xtz to the pool. Arbitrageurs would bring the kusd/btctz back to market price.

The dao/funding mechanism is just an option to give a use to the liquidity if it grows too big, the other most likely better option is to cut the subsidy and leave the liquidity there forever.

The main downside is that you would need much, much larger amounts of inflation to achieve a comparable amount of liquidity. Of course as you wind this up, you could sell all of the remaining tokens and burn all of the tez, so the net inflation might be small in the end, but it might not. The entire risk (impermanent loss, hack etc) would be born by the protocol instead of the private LPs responding to an incentive.

2 Likes

Exactly. This is the key.

I will highjack your thread a little, talking about making liquidity baking better.

What tools or features to mitigate impermanent loss, will be offered to liquidity providers? Bancor uses some kind of design that mitigate the impermanent loss, Uniswap v3 is also using something to mitigate IL, new DMM kyber network, also have some kind of technology that mitigate this for high volatile assets. Seems to be a trend.

XTZ and BTC are high volatil assets, doesn’t make sense to use this same features and designs to attract more liquidity providers?

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