Announcing Granada

[ktorn]

Disappointing to see the amount of ad hominem arguments on this thread.

I’ll share my portion of guilt for not engaging earlier in the process. We all need to engage early, not just after people put a lot of effort into actually implementing a proposal and broadcast it on the network.

I could say a lot more, but I rather not burn bridges today, so instead I’ll just re-post this which basically summarizes my opinion as of now:

@TezosGovernance

Let’s just bootstrap this with tzBTC. As soon as we switch LB to a non-KYC (trustless & permissionless) BTC stable coin (“tBTC”) the liquidity from tzBTC will move to the new tBTC. That will essentially undo this mess. Therefore we can test in production with tzBTC for now, and then hit full throttle once tBTC is ready knowing it will work for sure.

Assuming that we all agree that Liquidity Baking is, in principle, not just good but potentially critical for Tezos. Hope we can move on and work on improving all aspects of future proposals.

Disclaimer: I have no idea if ‘tBTC’ is actually an ongoing project. But if it isn’t, it should.

Edit: I am in principle against providing liquidity to fiat-based (USD) stable token. BTC is liquid enough and allows for fully transparent custody.

[trolleps]

@Tezla

One is a founder who deeply cares about Tezos and is attempting to solve some real problems with incredible tech that actually has safeguards in place

It doesn’t mean that everything he says should be accepted by the community without a dispute.
We’re all tez holders here and interested in the best for tezos

@Tezla

Then another perspective that seems to be on a witch hunt for tzBTC, both have a stake in kUSD

First off there’s no stake in kusd as it’s a stablecoin, there’s no stake in kolibri, it’s a DAO and guys do have tokens of it.
I’m not a stakeholder or whatever you might call it but I raised concerns about tzbtc months ago.
Nevertheless Luke admitted that kusd doesn’t fit here because it doesn’t have liquidity and to me wUSDT/wUSDC sound way better, though I’m not sure it’s been properly tested.

[trolleps]

Nope. LB is to make tez liquid by using a pair with an asset that is liquid somewhere else to bring liquidity to tez.
tzbtc (arguably) brings tez liquidity of btc. if it was easy to convert without KYC, you’d get tez liquidity of the whole xtz/btc market
on the other hand kUSD doesn’t have this liquidity, it can’t be swapped to a liquid asset

[rafoo]

@keefertaylor

I still have some outstanding questions (feel free to chime in!):

• I’m not sure the exact steps to compile from protocol alpha to proto_010
• I’m not sure if the asset can be an FA2 token, or if we’re limited to FA1.2 only

I don’t know if you got an answer for these two questions so sorry if this was already said:

• there a script in the Tezos codebase that copies src/proto_alpha into a new directory and performs the required renames where they are required. It is scripts/snapshot_alpha.sh. It will also copy the documentation so you probably want to rm -rf docs/010/ before calling it.
• The CPMM script used in Liquidity Baking only supports FA1.2 but it is based on Dexter v2 which supports both FA1.2 and FA2 so adapting the CPMM to support FA2 is not a lot of work but definitely not a one-line change. Also, the CPMM in its current form has been the object of much more testing and verification that would need to be redone.

@keefertaylor

To remove Liquidity Baking (uncleanly, but successfully) we could just set sunset level to 0. This effectively means liquidity baking exists, but is never turned on. We’d update that constant here:

That’s true but it pollutes the chain with a pair of smart contracts that are probably not going to be used much because without the subsidy it is less interesting to provide liquidity on them than on Dexter or Quipuswap. An alternative one-line change to deactivate Liquidity Baking is to remove the line that originates the CPMM and its liquidity token FA1.2 contract during the migration; if the CPMM is not found the protocol does not send the subsidy but nothing else should break.

[tezoswakenbake]

Yes, I know currently kUSD is not liquid, but like I said that was the advantage of AMM over conventional order book exchanges, that there will always be liquidity for otherwise illiquid markets. If there is an economic incentive in the form of a block subsidy, wouldn’t that attract people to lock TEZ in ovens and mint kUSD in order to be able to provide liquidity to retrieve the block subsidy reward? Wouldn’t that increase kUSD liquidity to be easily exchanged for XTZ, in the hypothetical XTZ/kUSD trading pair? My rationale is based on common sense, but idk tho.

[Eguzki]

I completely agree on the need of providing use cases to the tokens if we want to retain the liquidity attracted with LB, the subsidy is great to bring the liquidity but IMHO it’s an expensive way of retaining it and there are alternatives.

It would be great to have a discussion on the matter and you all are invited to join.

https://forum.tezosagora.org/t/game-theory-of-liquidity-baking

@tezoswakenbake I also explained in this thread why I believe kUSD is a bad choice for liquidity baking: ovens can attract manipulators looking to profit from liquidation events.

[Lindw0rm]

It is likely USDC will come to Tezos natively in the near future and as such tzBTC was chosen. Main trading pairs on exchanges tend to also be in USD & BTC. But Kolibri could have been chosen, for example, yeah. (except that both USDC and BTC have a LOT more liquidity…)

[dawsy8888]

I am hoping someone can alleviate this simple bakers concerns ?

1/ I am concerned about the risk that LB will put additional and continuous downward pressure on the XTZ price.

Where will the majority of the additional XTZ generated flow to ? Would it end up being sold on a CEX by those who have the rights to do arbitrage, and would this put downward pressure on the XTZ price ?

E.g Arbitrators will sell XTZ for BTC on a CEX, mint tzBTC from the purchased BTC, and then sell the tzBTC for XTZ on the Dex contract at a premium caused by the pool subsidy. The XTZ profit earned from the arbitrage is likely to be locked in by cashing out to BTC. There seems to be a risk that LB will introduce additional XTZ on the supply side of CEXs and this will be detrimental to price.

I wouldn’t be so concerned about this if the BTC to tzBTC conversion was an open market (and therefore efficient), even better if we had the opportunity to take advantage of the arbitrage opportunities ourselves, but it is not and we cannot.

2/ I am concerned that LB will unnaturally distort the delegation market and that as a public baker, I will bare the cost of this. That is it will cause our customers, who we have spent time and money attracting, to move their XTZ to the pool. Further, I am also concerned that if LB provides better returns than running a public baker, at a similar or lower risk, that it undermines our entire public baker investment.

Would the additional returns offered by LB encourage our customers to move their XTZ to the pool and therefore reduce the XTZ staked to us, reduce our income, and require us to spend more time/money to attract replacement customers ?
Are we likely to get a better return at a lower risk contributing to the pool than running a baker? ( if this is true, i also wonder if incentivising the narrowing of the delegation market is a good thing in itself)

Of course its ok to loose customers, or for your investment to depreciate, because of market forces. However, this isn’t a market driven outcome, it is a governance driven outcome that we have a say and it would be illogical for us to support a decision that negatively affects our business.

I hope someone can help alleviate my concerns

[lyoungblood]

@Lindw0rm

It is likely USDC will come to Tezos natively in the near future and as such tzBTC was chosen

We could always move the incentive from wUSDC/XTZ to USDC/XTZ once it arrives.

[murbard]

@lyoungblood

In the absence of decentralized tokens on Tezos with sufficient liquidity, wDAI, wUSDC, or wUSDT are good alternatives.

First, these have become available in late April. It’s important that design choices be communicated early so that people can engage in the governance process in a constructive manner by debating those choices.

Second, all of the underlyers for these suffer exactly from the same “borders” issue you flagged, including DAI which is primarily backed by USDC.

[lyoungblood]

@dawsy8888

There seems to be a risk that LB will introduce additional XTZ on the supply side of CEXs and this will be detrimental to price.

I wouldn’t be so concerned about this if the BTC to tzBTC conversion was an open market (and therefore efficient), even better if we had the opportunity to take advantage of the arbitrage opportunities ourselves, but it is not and we cannot.

I share these concerns. This will only enrich a few market makers, and those investors are probably not long-term Tez holders or delegating their Tez to a baker at all.

@dawsy8888

2/ I am concerned that LB will unnaturally distort the delegation market and that as a public baker, I will bare the cost of this. That is it will cause our customers, who we have spent time and money attracting, to move their XTZ to the pool. Further, I am also concerned that if LB provides better returns than running a public baker, at a similar or lower risk, that it undermines our entire public baker investment.

This is another valid concern that has been brushed off. Let’s say liquidity baking is very successful. Are we prepared as a community to allocate even more Tez to liquidity pools in protocol H? These distortions will create scenarios where it is more profitable for delegators to pool their XTZ instead of delegate and earn baking rewards, which will reduce the overall security guarantees of the network and starve the bakers themselves of income. Bakers, facing reduced delegations, may decide to capitulate and do one of a few things:

• Close down their baker completely, as they can no longer be profitable -or-
• Sell some of their bond, increasing downward price pressure -or-
• Take some of their bond and use it to do liquidity baking themselves.

All of these potential outcomes will result in reduced overall network security, as fewer rolls will be baking and securing the network. In the extreme scenario Tezos becomes a very centralized PoS with only a few large bakers like the Tezos Foundation securing over 50% of the network, simply because the DeFi rate of return is higher than network inflation.

[murbard]

@lyoungblood

Tezos becomes a very centralized PoS with only a few large bakers like the Tezos Foundation securing over 50% of the network, simply because the DeFi rate of return is higher than network inflation.

Sorry but that’s bullshit, the defi yield would have to be greater than inflation divided by the bond requirement for this to happen. I also have read Tarun’s paper, but I actually understand it, and you very obviously don’t.

[lyoungblood]

@murbard

Sorry but that’s bullshit,the defi yield would have to be greater than inflation divided by the bond requirement for this to happen. I also have read Tarun’s paper, but I actually understand it.

No, the baker rate of return, which is higher than delegators, doesn’t need to be lower (edit: said higher accidentally) than LB for this to occur. Delegators will see higher yields than 5.5% and move their Tez to liquidity pools. This will starve bakers of income and reduce their yields, creating a downward spiral where everyone is chasing higher yields.

[murbard]

@lyoungblood

No, the baker rate of return, which is higher than delegators, doesn’t need to be higher than LB for this to occur. Delegators will see higher yields than 5.5% and move their Tez to liquidity pools. This will starve bakers of income and reduce their yields, creating a downward spiral where everyone is chasing higher yields.

Sorry but that’s bullshit again. The yield from LB reduces as more people go into it. Assuming no impermanent loss, you get something like 6% of all stake going to LB instead of baking.

Happy to keep engaging on the financial engineering angle, but it’s clear you have absolutely no clue what you’re talking about.

[TezosGovernance]

@lyoungblood

All of these potential outcomes will result in reduced overall network security

This risk is completely mitigated with Tenderbake and it’s double finality.

[TezosGovernance]

A lot of people actually prefer KYC because they think it is safer. With that in mind tzBTC is the perfect asset to start with until we switch to a better token. It makes sense to have both a KYC and non-KYC options for different levels of risk tolerance. For example, banks may prefer tzBTC from a legal standpoint, while the people may prefer tBTC. Banks have more money than people so shouldn’t we cater to them? It makes sense to start with the old ways first, get oldies comfortable with legal MM, then switch them over to tBTC as we go into a true borderless economy.

[Felixls]

Is like Arthur is saying @lyoungblood , money sent to LB will increase the amount not staked that will increase the share for bakers and delegators.

[dexbabyplease]

Im at a point where I am willing to try it. If it works great were all happy and hopefully it is good for the ecosystem and fingers crossed the price. If it doesn’t, and is negative or detrimental to Tezos then it isn’t my reputation that gets damaged and well, we might all finally understand that cutting ties with the centralized entities and start fending and thinking for our selves might be more beneficial. Sometimes you have to get burned to learn to not play with fire. Otherwise godspeed.

[thesmogs]

I read carefully all the thread, and I think we can sum up the debate in a easy way.

The vast majority of people here are for the LB without a doubt.
Everybody agree to say the pair tzBTC/XTZ isn’t the best for many reasons, but it was propose few month ago, among the few available options, and no comment came at that time.
And with the Granada proposals,this debate appear.

To sum up, I’m seeing 2 sides.

The first one is for the Granada proposal.
Knowing it’s a test.
tzBTC/XTZ isn’t the best choice
nevertheless
It can be stop by the baker at any time, or after 6 months automatically.
And the main argument is : Tezos need liquidity now, it’s worth the risk of this experiment.

The second one against Granada the way it is implement now, mainly because of the chosen pair.
There is a dozen of arguments developed in all the thread explaining tzBTC/XTZ pair isn’t the good one (efficiency, centralization, KYC, conflict of interest, ….)

So from my point of view, here is the question :

Do you think the lack of liquidity on tezos, which seems to be a critical point for the development of the ecosystem, worth the risk of LB as it is implement in Granada proposal ?

Or

Do you think we should postpone the LB as it is implement in Granada proposal and take time to continue this debate on which pair is the more relevant, knowing the fact Tezos need liquidity and it might take quarters to see a new proposal with LB implementation ?

This debate is really instructive to me, and, I think, really healthy.
I personally think we should not wait, as the risk seem’s tolerable and bakers can stop LB. But I understand the concern of other parties about legitimacy of tzBTC.

[lyoungblood]

@Felixls

Is like Arthur is saying @lyoungblood , money sent to LB will increase the amount not staked that will increase the share for bakers and delegators.

According to Tezos XTZ Staking Validators & Calculator | Staking Rewards the current rate of return is ~5.51% APY for most delegators (depending on your baker fee/performance/etc). You are correct that reducing the rolls staked will increase this by some percentage. Let’s say it goes to 6%. That’s great, but the LP rate of return could easily be 2-3x this, and as a rational investor, I’m going to send my Tez to the liquidity pool that makes 10-15% APY, not 6%.