Thank you galfour for your insight. One of the brightest minds in the Tezos ecosystem.
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Sounds like the subsidy, is going to propitiate some sort of crony capitalism, even if the minting fee is miniscule, it matters. I don’t like that.
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It seems Liquidity Baking will need to be set up 3 times. Once for tzBTC/XTZ, once for a stable-USD/XTZ, and once more for a stable-USD/tzBTC. That 3-point pyramid would allow for full arbitrage opportunities. The more channels for arbitrage the more volume and so the more fees will get burnt to offset this new temporary inflation.
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I guess tzBTC is the best option at the moment.
What would it take to get USDT or USDC interested in using Tezos for issuance? They may be interested in Liquidity Baking on their stablecoins.
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Time and use cases, so yes, it’s a thing that might make them integrate sooner.
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I don’t think it’s a good idea to subsidize multiple pools. But what we could do is use a constant mean instead of constant product in order to have more than two assets in one pool.
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It is my understanding that the alternative protocol presented earlier today was injected in hash oo1SPmMcEzhLK8q2tvzfyuXtGkBkqmqWWMkyNgWNQCiVgAFTB7b.
Importantly, at this time I do not have opinions on whether bakers should / should not vote for this proposal, though I am happy that options and alternatives are being presented.
I’ve written my understanding of the protocol and it’s implications here:
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As a small baker, I I’m concerned on this matter. These proposal is reducing Bakers rewards by 6%. It is a subsidy at baker’s expenses.
It makes sense to obtain back the whole 100% block rewards, the whole cake, to us bakers.
It may be difficult to subsidize a stable-USD/tzBTC pair so I like your idea better since triple MM are supposed to be more stable. However that type of smart contract does not yet exist on Tezos. Therefore it may take more time to develop your proposed smart contract, than it would to use the existing technology we have and point to another pool on the next protocol upgrade.
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This is false and has been addressed above. The subsidy is an additional component that doesn’t come from Bakers rewards.
it doesn’t reduce anything, you still get your 100% of the pie and additional 2.5 tez per block goes to LB
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In terms of the number of XTZ that you receive, your baking rewards would actually increase very slightly. This is because any XTZ moved to the new liquidity baking pool are no longer involved with the traditional baking process, so you have a larger share.
Of course the new subsidy for liquidity baking does cause a small amount of inflation, so all Tezos holders (not just bakers) equally bear that cost. That’s rather the point, that we can take collective action through the governance process to do something that benefits the Tezos ecosystem (in this case by improving liquidity). That concept of collective action to achieve a public good has always been a consideration in Tezos and was mentioned in the original position paper from 2014.
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Well, it will be involved after Liquidity providers receive the payment. Some of them will choose to stake their TEZ. Some will dump them (and whoever who bought them will mostly stake them too).
If the XTZ of the trading fee was given to bakers instead of burned, we would all bear the cost too. Bakers would just distribute the rewards to delegators as usual. By burning them instead, it is like if we were being forced to distribute those rewards with a 0% baker fee to delegators. This will undoubtedly reduce incentives to run a baker node.
So to be fair, we will only have 94% of the block rewards, with full control of the baking fee, and 6% will now be free of baker fee (0% baker fee). Before this LB thing, we would get 100% of the whole pie of the monetary emission, and we could choose the baker fee of the whole cake.
Your collective action sucks for us. Bakers are being deluded by the makers of this LB proposal, and they are ignoring this, “the public good” hides a baker sacrificial. Make a LB variant proposal, so the TEZ collected from the trading fee, is distributed back to bakers, so we regain control of the baking fee of the whole 100% of the monetary emission.
You keep repeating your 94% claim. It makes no sense and is confusing others. People, including the authors of the liquidity baking proposal, have told you otherwise but you still don’t get it. Block rewards are separate and continue as always. There is a separate emission for liquidity. It’s global inflation and affects everyone equally, not just bakers as you keep falsely claiming. You’re showing yourself to be a misinformed and greedy baker that wants to slap a baker fee on inflation meant to increase liquidity, just listen to yourself.
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Of course, it does make sense, currently, block reward is 80 TEZ. In that case, let’s print another 80 TEZ for LPs (why stop at 5 TEZ?), so a total of 160 TEZ block, then let’s charge traders a fee to recover in the best case scenario 79 TEZ (if trading volumes allows to recover all that), and then burn it. You will find that we lost control of the baking fee by 50%, because now 50% of the total block rewards are being distributed to delegators at a 0% baker fee.
Bakers in that scenario, will probably have to raise the baker fee of the remaining 50% of the block rewards that are actually rewarded to them. So don’t tell me that ad hominem that I’m greedy, because that’s what incentives for bakers are, incentives for bakers are based on rational self interest, and that’s how we maintain the network secure and decentralized, and that’s how we attract bakers to bake, and that’s how bakers lock their TEZ instead of selling them. We want more bakers to lock their TEZ in bonds, not less.
Yes, let’s perform collective actions if you want, but do not reduce the baker incentives for the love of god. This is how governance fails, when bakers vote for their own sacrificial and they kill their own incentives. So no, at the end i will vote for the proposal without liquidity baking, unless there is a new proposal that rewards the TEZ of the trading fee back to bakers, so we regain control of the baking fee for the 100% of the block rewards. So go ahead and defend your posture of running baking nodes purely on altruism, and i’ll keep defending my posture of running baker nodes with actual incentives.
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I disagree, we need to be very careful when experimenting with parameters that happen at a consensus level of the protocol. I would like to see tests or simulations for this change so we can estimate how it affects the tokenomics of tezos vs tzbtc etc, also, how does it affect current LPs like quipuswap.
A drastic change like this should not be taken lightly.
The TF works for “us”. What’s good for them is good for Tezos (ideally). In this case, the benefits don’t seem very high, though and the TF taking stakes in projects is mostly not to profit but to incentivize building on Tezos.
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You are falling into a fallacy of authority here, because you think that because the authors of this proposal are skilled coders, they must be also experts in economics, but this is not necessarily true.
This makes perfect sense. At the end we bakers are losing share of the block rewards from which we can apply the baker fee. Basically we are distributing tez to delegators with a 0% baker fee. You need to understand this, and the authors of the proposal as well.
This is my thinking too. Bakers incentives must not be decreased by any means. This is an awful economic mistake and a really bad idea. Bakers forcing other bakers to give up block rewards at 0% baker fee. @murbard and the other authors, need to be humble and accept they are wrong on this matter.
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Believe what you want, but to others and myself your logic absolutely makes no sense.
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First of all I want to thank you and @murbard for taking the time to answer me both here and in the new topic I opened.
I completely agree on the huge difference in the liquidity achieved between my idea and the current LB implementation, specifically the current approach would yield up to 80 times more liquidity in a 6 month time frame and up to 40 times more in a 1 year time frame assuming an efficient market and comparing to the yield of baking, but wouldn’t necessarily grow as time continues.
After thinking about it I believe your approach is the best one. Yet, I would like to know your opinion on the following points:
The current LB archieves great liquidity giving a subsidy to private liquidity providers, but what will happen when the subsidy ends?
Personally believe a meaningful fraction will stay in tezos, for the simple reason these market makers already went trough the hassle of KYCing and wrapping the BTC, but might migrate to other contracts with higher fees.
And that brings me to the next point:
It might be a good idea to do LB with different assets pairs for a limited amount of time e.g: 6 months, to jump-start liquidity and then hope it will stay there without further incentives beside defi and fees, (Lugh, kUSD, USDC and wETH come to mind).
This being said I support the current implementation of LB, but I believe the subsidy for a given pool should be temporary.
As always, I would love to know your thoughts about this.
Edits: cleaning and correcting poor phrasing and english 
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