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.
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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.
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…)
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
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We could always move the incentive from wUSDC/XTZ to USDC/XTZ once it arrives.
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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.
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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.
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.
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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.
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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.
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.
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This risk is completely mitigated with Tenderbake and it’s double finality.
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.
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.
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.
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.
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%.
Obviously this will centralize baking by reducing the baking nodes. Specially because bakers won’t be able to apply baking fee to the 2.5 generated TEZ. That’s what I have been saying, but they say i’m being “greedy” whatever. If bakers charge a 10% baking fee, that’s 0.25 TEZ that they’ll be losing if is burned, PER BLOCK.
you’re not gready, you’re just trying to apply baking fee for what isn’t baking rewards
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That is decided by bakers, not by @murbard nor by you. The only ones that can decide if that 2.5 is theirs or not, are BAKERS.
I’m going to send my Tez to the liquidity pool that makes 10-15% APY, not 6%
Is different business, 10-15% APY high risk (IL, rug pull, holding tzBTC or whatever, etc) vs baking and a compound 5.5% APY
This is mentioned in the proposal, small and medium bakers might increase their fees, the problem will be for the big ones (like exchanges) cause tez will flow to the blockchain.
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