Liquidity mining was developed for a lot of defi token but it could be used for xtz itself.
This would work as follow:
- Create a Dexter contract for XTZ / TZBTC, or some other pair (a stablecoin for example)
- Make sure this contract does not have a baker (this is important)
- Change the protocol so that 10% of the XTZ created in each block is credited to that Dexter contract balance.
This would create a lot of liquidity for this pair. Let’s see how:
There are about 860M xtz on the chain, 80% of which (or 688M) participate in delegation / baking and share about 42M xtz per year. 42 / 688 ~= 6.1% / year.
Now assume people only become lp in this Dexter contract for the subsidy, ignore as a rough approximation the incentive of potential profits and disincentive of potential impermanent loss.
Suppose x XTZ are placed in this Dexter contract, then there would be (688M - x) XTZ participating in delegation and earning 42 * 90% = 37.8M XTZ a year. And the x XTZ in Dexter would earn 4.2 M xtz per year.
Baking vs. liquidity mining equalise when 42 M* 90% / (688M - x) = 42 * 10% / x which gives x = 68.8M. This also means that the baking reward is unchanged at 6.1% per year.
So if 10% of the block rewards, went into a Dexter contract that doesn’t delegate, the baking rewards would be unchanged as a percentage, and you’d end up with around 68.8M xtz of liquidity in a Dexter contract.
What’s the catch? This seems to good to be true…
There is a catch, while the percentage of baking rewards should stay the same, the total amount of xtz looking to delegate would be smaller, which would push delegates to demand lower fees from bakers. The bakers who would be negatively affected by this might be that charge the largest fees, such as Binance (100%) or Coinbase.
Ok but then why 10%, why not 50%, 90%?
Because then the amount going to secure the network would be too small. 10% is small enough that it’s unlikely to break anything, even if there are unforeseen effects.
Why not also bake for this contract wouldn’t it be even better?
No, the equilibrium point would be the same, with the difference that now you’d have to deal with the problem of entrusting a baker with a huge delegation. See this post.
Is it complicated to do?
No, Dexter already exists, it’s a matter of changing the protocol so that 10% of the block reward goes into the contract. I don’t know for sure how hard it is to do this in the protocol but it seems super easy.
Should this be done?
The only question should be the percentage. If 10% is scary (but I don’t think it is), then maybe just 1% is worth doing, just to try it.