Liquidity mining on Tezos

Research and Development
1

Liquidity mining was developed for a lot of defi token but it could be used for xtz itself.

This would work as follow:

  1. Create a Dexter contract for XTZ / TZBTC, or some other pair (a stablecoin for example)
  2. Make sure this contract does not have a baker (this is important)
  3. 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.

FAQ

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.

8 Likes
2

Isnt this already the case? The smart contract delegates and receives rewards hence increasing liquidity (proportionally assigned to the participants)

3

No it’s not the case. People don’t miss out on delegating when they go into the existing Dexter contract, but they also don’t get any special incentive beyond collecting the swap fees.

4

Hi, Steve. I implemented a generalized solution to this using tickets and based on Arthur’s virtual baker idea in your other post. Stay tuned for a post within the next week explaining the design decisions, which I’d love your feedback on. Tl;dr the virtual baker contract inflates on snapshot blocks using a bonding curve currently set to (1-x)^4 where x is the balance in the virtual baker contract as a percentage of total rolls and charges a .04% fee on deposit to prevent manipulation.

You can play with it in a sandbox if you’d like by building from this branch and using this contract, which is injected in the genesis block of Proto Alpha.

3 Likes
5

If I understand the proposal correctly, it’s not about trying to solve the problem of baking for contracts like Dexter at all, which the virtual baker does. It’s about using inflation to subsidize liquidity as a public good. This proposal doesn’t need the virtual baker and wouldn’t benefit from it.

1 Like
6

Hi. Here’s my two cents. I believe we don’t have to increase inflation or move it partly from bakers to a dexter contract for the following reasons

  1. Mixing existing economics of the protocol with the economics of an app on tezos sets a precedent for every app to change it in their favor.
  2. Dexter’s XTZ/TZBTC is just A pair on A Dex. Many pairs and many dex’es are to come on tezos. How do we decide which one to incentivize?
  3. Liquidity providing to a AMM exchange is a tricky and potentially unprofitable action that can lead to substantial losses, people has to understand their rationale and should not be confused by the additional rewards
  4. From the other side (or the most important side) bakers make an impression of struggling to make ends meet, are we ready to lose those bakers? Doubt it

We have a non-profit TF that shouldn’t care much about the xtz/btc ratio and IL, they can add liquidity

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In your example, you give 10% of block rewards to a dexter contract. What happens when you have 500 dexter contracts? Are you giving 10% to each contract, each block? That seems wrong/incorrect. How do you decide which contracts get the reward? Who decides this?
This feels like creating a solution to a problem that doesn’t exist yet. Dexter isn’t even 6 months old yet; give it time to start increasing in usage and this won’t be an issue.

Also, I 100% agree with trolleps #1. You are mixing core chain protocol’s with a specific app. Why won’t you give 10% to my app? This starts a dangerous trend where some apps get block rewards and other apps don’t. Then people start leaving tezos because someone else’s app get’s a bonus while theirs does not.

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Thanks for your reply.

  1. The point is not to help “Dexter, the application”. Dexter is just code used for this, it could be code in the protocol, it doesn’t matter.
  2. The pair with the asset that is the most liquid. tzBTC is a good choice, a stablecoin like USDC would be an even better choice, but it’s not on Tezos.
  3. Yes, so the amount that ends up in this contract may be a little less than what is provided only from the reward, but it would still be large.
  4. Bakers may pass on costs by increasing their fees. In the end, this benefits all of Tezos.
  5. They haven’t done it and may never do it.
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No just one specific one.

No don’t care about helping Dexter, goal is helping Tezos.

100% disagree. Doesn’t matter if it’s Dexter or some piece of protocol. It’s just open source code, it does a job.

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well it’s not just open source code, it’s dexter, quipuswap, SEXP and other projects.
every project wants to get users, gain liquidity etc.
you might want to make a token standard for LP tokens and dedicate 10% of inflation to all lp tokens following the standard but I’m not sure we have to address this problem at all.
Dexter announced an institutional liquidity provider
Let it go and see it grow
Dex’es on ethereum have great liquidity without any incentive on a protocol level

11

Then take the piece of code and call something else, retxed, or swapuqit. It doesn’t matter. The idea doesn’t help the maker of Dexter or the maker of Quipuswap, they gain nothing from it.

Only question is does the code do the job? Yes or no. Point is not to help dexes on Tezos, point is liquidity!

1 Like
12

IMHO the elephant in the room is that providing liquidity to a volatile pair on a AMM Dex is a risky activity.
I don’t see how subsidising this is in the interest of the Tezos network as a whole, in the end we would be giving free money to informed and already rich market movers.

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right now xtz btc pair is at its lowest, it means providing liquidity equals being rekt by IL.
and we don’t have a decent stablecoin yet.
too early to take drastic measures

14

So what? There is a risk, but there is also a risk of holding to xtz. The risk means that the fraction of delegated tez going into the pool may be less than 10%, but probably not much less. Uniswap pools at Ethereum did fare well.

Can’t buy any serious amount of xtz without moving the market a lot, which means it’s not even on some people’s radar. Why do you think Litecoin has any value?

Impermanent loss goes straight back into the baker’s pocket anyway because they choose content of blocks.

15

No, you can have long term trend and short term oscillation. Also you have crystal ball for the market? I don’t.

Maybe better with a stablecoin, but btc is very liquid, and correlated to xtz so volatility of pair is lower. Easy to change to stablecoin later anyway if there is stablecoin.

  • ~ 0 change to baking annual %
  • ++$100M of liquidity
  • simple patch
  • IL goes back to bakers

Only thing drastic is wanting to quibble over this :joy: :rofl: :joy:

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Mixing existing economics of the protocol with the economics of an app on tezos sets a precedent for every app to change it in their favor.

The point is not to help “Dexter, the application”. Dexter is just code used for this, it could be code in the protocol, it doesn’t matter.

every project wants to get users, gain liquidity etc.

There is a lot of focus in this thread on Dexter specifically. I believe this is taking space away from the actual proposition, which is to make Tezos much more attractive by using its governance to provide liquidity to XTZ. This would set Tezos apart from other blockchains by banking on one of its comparative advantages.

If we are afraid of looking like we favor a Dex in particular, or if we are worried about safety issues, we can just code one in OCaml. I personally prefer just funding an existing contract, which is simpler, but I could go either way.

Dexter’s XTZ/TZBTC is just A pair on A Dex. Many pairs and many dex’es are to come on tezos. How do we decide which one to incentivize?

At first, a simple Uniswap with a useful pair as a working proof of concept sounds good. If this works as well as expected, we might want to structure this with a DAO, or an intermediary governance layer.

1 Like
17

By subsidizing with inflation not governance. Governance only decides whether it’s a good idea or not
Actually by taking a part of the inflation from bakers

The idea of picking THE pair contract sounds weird to me,
why make another dex then, when your competitor has an advantage on a protocol level

Once again we don’t have a stablecoin yet
xtz btc is at its lowest, it means the worst time to provide liquidity due to IL.
There might be no problem at all, let’s wait and the market decide
Lastly we have TF with the biggest xtz and btc bags and as a non profit they should not care that much about their xtz btc ratio

P.S. Uniswap has liquidity without any subsidy on a protocol level

18

Goal of Tezos is not to have people build dex, dex is just a tool. Also, there are many other pairs people might like.

So what? BTC is very liquid.

No, depends on how market moves at small scale + IL goes back to bakers anyway.

Let governance decide, this is a public good.

You can stop subsidy if they start doing it. No indication they ever will.

Ethereum is much bigger market cap and liquidity than Tezos. Do you want to win or not?

1 Like
19

For what it’s worth I think it’s a really good idea.

A few thoughts.

On the cost

The assumption that somehow this would end up being born by binance / coinbase seems a bit too rose-colored. Ultimately the consequence is bakers needing a slightly larger bond for baking. As bakers adjust the rate at which they purchase delegation power from delegators, the cost ends up being born by all tez holders. Even then, it sounds like an obvious trade-off to make. To avoid bakers having to reprice their agreements, I would suggest adding a small extra reward to the block as opposed to splitting the existing one.

On IL

The argument that IL ends up captured by bakers anyway and so is internalized is essentially correct, but bakers do have to actually go out of their way to capture it. It doesn’t seem that they bother to do so on Ethereum yet (though they capture the large tx fees of bots trying to grab the entire blockspace for themselves). Open-source software allowing bakers to do capture it would go a very long way.

On implementation

This is really straighforward to implement. It’s worth taking a second and triple look at the dexter code given the amounts potentially at play, but overall this is an easy task. It’s also a rather awesome demonstration of what Tezos governance can do.

3 Likes
20

And what of QuipuSwap? What about a DEX that doesn’t exist yet?

After all the careful planning, building and navigation to arbitrarily choose winners and losers like this seems foolish. The base layer shouldn’t be funding this or that. It either funds everything or nothing to remain neutral.

This parlor trick doesn’t win us anything except discontent from half of the community. I don’t want to win anything by compromising the whole base layer.

By the way I find the block subsidy an interesting idea but not executed like this toward a single DEX pair.