Altruist vs Rational self interest reflection & LB variant with trading fee reimbursed to bakers. Salty thread be warned

Philosophy and Economics
23

What you mean delegate? Delegate to whom? I’m the delegate, you mean delegators delegating to a baker?. Of course for them there won’t be dilution, the dilution is for bakers since, they are not applying the baker fee to what’s being burned. Delegators would just get the benefits of wealth redistribution while bakers suffer the consequence and will have to raise the fees. What you mean “or provide liquidity to the LP” you want bakers to be the liquidity providers themselves?

We are already providing the liquidity in the form of a subsidy to fund private LP’s, so they expose themselves to impermanent loss risks and not us. The only problem is that the traders are not reimbursing us back the TEZ, so we can apply the baker fee, the traders TEZ are sent to a burning address instead.

You are not implying that bakers quit their baking operations to become LP’s right?

24

Sorry for getting the terminology wrong. If you have XTZ you can stake them or provide to the LP. In both cases you wont be diluted. I just threw this in since you implied that there would be dilutionary inflation. The other points are more relevant to your gripes.

25

No, if you own XTZ you can provide those to the LB LP pool or stake them with a baker. The LP is a dexter contract that has NO delegating option. https://gitlab.com/tzip/tzip/-/blob/master/drafts/current/draft-liquidity_baking.md
“The ability to set a delegate and receive rewards has been removed. Rationale: the subsidy means there is no need for a baker for that contract and having one would create an imbalance.”
So XTZ in the LP effectively are part of the non staked XTZ that would be diluted if not for the subsidy. That subsidy is paid for by the trading fees if there is enough trade.

26

Is just mean that the contract that is holding the subsidy can’t delegate the coins to a single baker, that would be unfair that’s why is deactivated and can’t receive baking rewards. But once that the XTZ is paid to liquidity providers, they can use their earned XTZ to delegate to a baker or dump it in the markets.

27

Exactly, it means that the XTZ in the LP, which are far far more than the LP rewards are removed from receiving block rewards. Now bakers still get the same 40 XTZ to distribute to fewer stakers and themself. But i do not know enough how that would work out in the baker economy/ business model.

28

Yet another way to look at it slightly differently:

As long as there is enough trade, the only relevant thing that happens is, that traders pay ppl to put their XTZ in the LP instead of staking them. That’s it. And the size of the LP is rationally capped due to the 1/16 ratio.

29

The subsidy that is going to be sent to the LP contract, is just going to stay there for a very short period of time, LP’s will earn that XTZ and will stake it by delegating it to a baker, or they will dump it in the markets, and the ones who buy that dumped XTZ will put it immediately to stake by delegating it to a baker. So the time that the subsidy is inside the contract from which is forbidden to delegate and receiving rewards from a specific baker, is not enough to offset the 262,800 XTZ that bakers will lose annually, the time that the XTZ will stay there in the contract not receiving rewards is minimum, is infimum, not enough to be significant.

You want to make it see, like if the subsidy that is put into the contract it will stay forever there without being moved, denied from receiving baking rewards, this is not true, the subsidy inside the contract will be quickly earned by LP’s, and they will stake it.

30

Yes, so to offset the 262,800 TEZ baker loss of block rewards a year, then liquidity providers earnings would need to be locked inside the contract, without the possibility to delegate to baker to receive rewards from delegators for a whole year or more. But this is not the case, because as soon as liquidity providers earn the TEZ from the subsidy is already in their possession and they are able to stake it right away.

Okey, let’s burn it, but liquidity providers can’t retrieve their TEZ reward from the contract in a whole year after earning them. Not cool for them if we are making them hodl a year. This wouldn’t be necessary, we go to back to the same solution that, if the amount of the trading fee was reimbursed to bakers instead of burned, nothing of this would be necessary.

31

That is not what i said. I made 2 statements:
If there is enough trade then:
A.) There is no loss for bakers since subsidies and burns cancel each other.
B.) Essentially the trading fees pay ppl to put their XTZ into the LP instead of staking it.

You comparing the effects of B to an imaginary loss is beside the point. But before you answer let me prove Point A to you:

Lets do a thought experiment at what would concretely happen when the LB protocol and LP goes live.
First let make a more specific assumption than above:
Subsidies total = Trading Fees total = 2.5 XTZ
Events:
X+ is the Event of 2.5 XTZ created through subsidies
X- is the Event of XTZ burned.
fp is the Event of a trading fee getting paid.
lp is the Event of the LP getting paid.
X+ and lp come in pairs and fp and X- come in pairs.

This events happen continously. We are seeing many fp → X- and one X+ → lp event per block.

Now assume that X- and X+ operations are extremly expensive and transfers free.

The first thing a dev would say is lets tally those created and burned XTZ up and send what possible in transfers directly from trading fees to the LP to avoid unnecessary expensive operations.
Luckily both are the same, they are 2.5 XTZ , so there are no subsidies or burns left. This gives the exact same result as if you had all these burns and the subsidy creation.
fp → (X- cancels X+) → lp
fp → lp
Lets call this LP Alice.

Now sadly the size of this LP is soft capped but there is demand for a second LP of the same size.
We have established above that Alice can, but does not really need to do those expensive subsidy and burning operations as long as both sum up to the same.

So Jeff Bezos comes along and creates the same LP without any subsidy and burn mechanism, lets call it Bob.

Both LPs run side by side, both give the exact same observable results to all participants.
Alice might run those burn and subsidy operations or they might be optimized away.
Bob certainly does not.

But according to you Alice does steal 262,800 TEZ/ year from bakers while Bob does no such a thing.

Why?

32

I never said LPs were stealing the 262,800 TEZ a year. They are not stealing anything. I said 2,628,000 TEZ a year from fp are distributed to all TEZ hodlers (which includes delegators) with a 0% baking fee the moment is burned.

Let’s do the following, I can calculate exactly how much wealth transfer is going to happen at my bakery due to this new policy, putting my bakery as example, which is at full capacity:

Baker share of the whole staking capacity is 9.31%, by delegators have the rest 90.69% share. Meaning that only 9.31% of the block reward is mine and 90.69% of the block reward is for my delegators.

Here is my baker share if you need proof

Screen Shot 2021-06-06 at 22.08.39
Screen Shot 2021-06-06 at 22.08.392646×818 118 KB

Without liquidity baking:

thirty seconds block reward of 40 TEZ (100% of the block reward)

Taking my 9.31% share, 40 * 0.0931 = 3.724 TEZ from that is mine WITHOUT a baking fee, because I don’t charge to myself a baking fee.

Now 40 - 3.724 = 36.276

Now, I subtract the 10% baker fee: 36.276 * 0.10 = 3.6276 (this is what I earn due to the baker fee).

Now, 36.276 - 3.6276 = 32.6484, this is what I will distribute to the rest of my delegators with the baker fee subtracted already.

My total earning from the 30 second 40 TEZ block are = 3.724 + 3.6276 = 7.3516.

The earnings of my delegators to be distributed are = 32.6484

Now with liquidity baking

For the 40 TEZ (94% now of the TEZ printing machine) it all stay the same.

I earn 7.3516 and my delegators earns 32.6484 with the fee substracted already.

Now let’s see what happens with the 2.5 extra printed TEZ.

Subsidy of 2.5 TEZ → LP’s

Note: lp’s will either stake it right after they earn it, or dump it, buyers of that dump will also probably stake it

Scenario 1)

Traders recover 2.5 TEZ → Burn = redistribution of 2.5 TEZ to all hodlers.

NOTE: burn is something not anyone can grasp in their minds, burn means redistribution of a quantity equally to all hodlers

My previous earnings of the 40 TEZ block were 7.3516

2.5 * 0.0931 (my staking share) = 0.23275

7.3516 + 0.23275 = 7.58435

The previous earnings of my delegators of the 40 TEZ block were 32.6484

2.5 * 0.9069 (their staking share) = 2.26725 TEZ

32.6484 + 2.26725 = 34.91565

So my total earnings and the earnings of my delegators in this scenario are:

7.58435 vs 34.91565

Scenario 2)

Traders recover 2.5 TEZ → Reimburse to bakers

2.5 * 0.0931 (my staking share) = 0.23275 (I don’t apply a baking fee to myself obviously)

Now, 2.5 - 0.23275 = 2.26725

Then I subtract a baker fee of 10% to that amount, so, 2.26725 * 0.10 = 0.226725

So, now that I subtracted the baker fee, I need to rest it from the 2.26725 - 0.226725 = 2.040525

2.040525 with the 10% baker fee already subtracted that I will distribute to my delegators.

My total earnings of that 2.5 block would be 0.23275 + 0.226725 = 0.459475

2.040525 of the 2.5 TEZ will be distributed to my delegators.

OKEY, now let’s sum up all the profits of scenario 1) and compare them to scenario 2)

Scenario 1) profits

My baker: 7.3516 of the original 40 TEZ block + 0.23275 (of 2.5 TEZ of scenario 1) = 7.58435

Delegators: 32.6484 of the original 40 TEZ block + 2.26725 (of 2.5 TEZ of scenario 1 ) = 34.91565

Scenario 2) profits.

My baker: 7.3516 of the original 40 TEZ block + 0.459475 (of 2.5 TEZ of scenario 2) = 7.811075

Delegators: 32.6484 of the original 40 TEZ block + 2.040525 (of 2.5 TEZ of scenario 2 ) = 34.688925

THE END RESULT IS:

Scenario 1 where the trading fee is burned, I earn 7.58435 and delegators earn 34.91565.

Scenario 2 where the trading fee is reimbursed to bakers, I earn 7.811075 and delegators earns 34.688925.

The result is that there was a WEALTH TRANSFER of 0.226725 XTZ from baker to delegators due to this policy EVERY BLOCK. That’s 2.9% of FORCED wealth transfer every block to delegators.

Delegators are not stealing anything either, is the result of bakers forcing other bakers to redistribute wealth due to this hidden TAX, they are reducing their own incentives.