Liquidity mining on Tezos

“Hey Larry, you heard they started liquidity mining on Tezos by giving some block subsidy for an LP?”

“Oh yea, where is that at?”

“Oh, it’s over at Dexter.exchange”

“Nice, yea Dexter is my default go to exchange as well”


“Hey did you hear about this new DEX they put on Tezos?”

“Oh yea do they have any liquidity like on Dexter?”

“Nah it’s shit, no liquidity like Dexter.”

I would like to retract my arguments; I was under the impression this will be “on” Dexter as opposed to originating another contract using Dexter code to be used by anyone.

Only consideration now is security since this will be the first lucrative target for Tezos DeFi.

Thanks for the response. The big takeaway for me is that Bakers themselves could automate arbitrage and include their transaction as the first in every block they produce to capture that gain for themselves. Not sure how frequent this could happen for small bakers though as they don’t get many blocks. But if someone were to be active in a DeFi market on Tezos, it would be beneficial to them to be a baker so they can guarantee themselves inclusion in a block.

420,000 additional tez minted annually would only be 0.05% of the supply, and 0.05% is a tiny number. Just the fee of just one call to a typical uniswap contract is 5 times larger than this!

Sorry, I don’t follow. How are the two metrics comparable?

It’s a tradeoff. IMO, for this proposal, anything under 10% of the existing total block reward (be it a part of it or in addition to) is probably a good idea, anything under 5% of the block reward is basically a no-brainer. Bitcoin marketing has trained people to focus on supply and emission without any sense of proportions or orders of magnitude.

Personally, I think 10% of the existing block reward is much too large. An additional 4,200,000 XTZ per year just seems very drastic. 5% or 2,100,000 XTZ is more palatable, I guess, but whatever the case may be I’m more likely to lean conservatively on any sizable increase to coin emission if its coming on top of current block rewards. Obviously a 10% increase over current block rewards looks small relative to supply outstanding, but it adds up.

A supply and demand balance needs to be kept in regards to bid on XTZ otherwise the currency could depreciate. There needs to be a buyer, or holder, for each new unit of XTZ.

From an economic standpoint, it’s actually makes no difference, aside from menu costs. Taking it as part of the block reward may require baker to pay delegate a smaller part of the block reward whereas doing it as an additional means they don’t have to change the fraction they pay. Net net, one is not more inflationary than the other.

Makes sense if you assume that the delegate will have this decrease in block rewards pushed onto them as a cost, which it may. So, good point.

Not quite sure what you mean.

That’s because it was an incomplete thought lol. I meant to say that even though there would be additional XTZ entering the market, the other half of the trading pair used to buy that XTZ would stay within the Tezos DeFi ecosystem, which I think is a good thing.

Well a checker-like robocoin would be a good fit, wouldn’t it :slight_smile:
But it’s not there yet and tzBTC is a great choice for this.

Agreed that its what we have for the time being so it’ll do for now. Really looking forward to Checker’s release; hope its going well. Maybe the liquidity could be ported from the XTZ/tzBTC pair towards the “checker-like robocoin” pair when the time comes. The custodialized nature of wrapped coins feels like an attack surface if they’re not redeemable.

I definitely think it would be a plus to have a stable-ish token derived from the base currency as the protocol supported pair. Its censorship resistant that way.

It’s a point of reference. People who wouldn’t bat an eye at spending 0.25% twice by transacting their entire balance with a dex shouldn’t be more bothered by 0.5% dilution. Of course you can be bothered by both, but people sometimes treat the latter differently. The fact that you’re quoting absolute number of tez makes me think you might.

Another way to put it into context is that over the past two years or so, the average daily standard deviation of the purchasing power of tez has been roughly … 0.5%. You’re talking about a yearly rate that doesn’t even raise above the noise of a single day.

But for 10% of the block reward, 0.5% dilution is an upper bound. The real dilution is actually the cost born by the LP (the IL) minus the part which is recaptured by the bakers, which can be the bulk of it.

I wanted to post that I’m strongly in favor of this proposal. I plan on writing some more detailed thoughts about this to share all the reasons why this will help the Tezos ecosystem, and will share them in the next few days.

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This is now a TZIP draft:

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I’m leaning in favor of this proposal after weighing both sides, and feel it can be particularly useful in our scenario considering we’re one of the few projects that does not employ unbiased market makers/liquidity on centralized exchanges. This can be a way to drive more users to use a DEX over a CEX, while providing much-needed liquidity. I think the choice of which pair to support will be an important decision, whether it’s tzBTC or a stablecoin (more of these are on the way also).

I am admittedly not an expert on defi, so here are my questions/concerns:

  1. It is my understanding that the ratio of each token in a liquidity pool typically determines the price of each. Therefore, would depositing only XTZ via this proposal lower the price/exchange rate of XTZ?

  2. tzBTC was noted as being very liquid because BTC is liquid, but not necessarily equivalent because the tzBTC needs to be minted and deposited. If XTZ is constantly added to the balance but the tzBTC balance remains low, would this not inflate the price of tzBTC rather than XTZ?

(I’m aware this can be taken advantage of and resolved via arbitrage if it’s the case, but considering a potential yet unlikely scenario where this contract becomes a major factor in determining XTZ price in itself, rather than following centralized exchanges)

Thanks! All in all a good proposal.

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Imo
1.If it becomes so liquid to be a major factor in determining tez price, 5 tez per block won’t be the case
2. As I posted earlier here I’d love to see an xtz / native tezos stablecoin pair because it drives the adoption for the stablecoin as well. and tzbtc is a custodial asset

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Agreed on 2. One important key to understand why (2) works is that, if such an asset has very low volatility with respect to a fiat currency, it’s very cheap for it to be liquid on its own. Therefore the effect of having liquidity between tez and such an instrument is similar to the effect of having liquidity directly between tez and a fiat currency.

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Two questions regarding this proposal:

  1. Is this block reward going to be perpetual or time-bound(say we are going to try this for 3 months or 1 year)? I would prefer it be time-bound rather than perpetual.
  2. What are the plans for supporting - say another pair- xtz/tzeth or something else? How would the newly minted tokens be distributed with additional pairs? Based on proportional liquidity or constant factor?

As a safety precaution, the subsidy expires automatically after 6 months but it can be renewed periodically by protocol amendment.
This proposal is for one pair only though it can be changed

@trolleps - Thanks for the response.

This has been discussed before by other participants in this thread, but sharing my concerns as well. I somehow feel it weird to change the economics of Tezos protocol at such an early stage. Can we not do try to increase liquidity through other means first? As someone has said before: dexter is just 6 months old, and we just need to give it time to catch up with more liquidity.

While this protocol change goes well for the Tezos protocol itself to demonstrate the power of governance, but doesn’t help the cause of XTZ- the cryptocurrency. Why would anyone want to hold XTZ, when the supply of the currency could be arbitrarily changed by the big holders at anytime through governance? While the point is that the inflation is rather small in this particular case, it sets a precedence for future changes to supply.

An alternative suggestion: Why can’t supporters of this protocol level subsidy form a tez pool and donate liquidity to the dex instead of taxing all tez holders? As the liquidity is going to be claimed by the participants in the pool anyway, this shouldn’t affect other tez holders who do not want to participate in this scheme. Tez - is first and foremost a cryptocurrency, and Tezos protocol is not a DEX. So, non-participants should not be taxed.

Taxing all tez holders should be considered as the last option IMO.

The beauty of tezos is it’s up to the holders to decide whether they wanna be taxed.

Liquidity is needed, you can’t even trade 1k xtz without slippage right now

And what if Tezos Foundation would use their baking rewards as liquidity? Any pros/cons from their side? Can you please share your view @tezosfoundation.

Afaik nothing changes when it comes to Tokenomics. I mean this 5tez per block will not be extra, the max tez created per block will stay at 80tez as it is right now. Also keep in mind that all the tez that will be provided as liquidity to that pair will not be staked, that means that the % of the tez supply that will participate in staking will be reduced, so the rewards for the rest will grow to equal the 5 XTZ that are “lost” for the bakers.

So all of the above won’t change the inflation or anything. Feel free to correct me if that’s not the case.

Reading this: drafts/current/draft-liquidity_baking.md · master · TZIP / tzip · GitLab - it is not clear if 5 tez is in addition or from the existing reward of 80 tez.

My understanding from reading the discussion is that- the proposal is to mint 5 tez in addition to 80 tez, which I am not convinced is the right thing.

There is an abundance of Tez- why are they not participating in dexter exchange by providing liquidity? Right now there is less incentive , but with KUSD soon launching, I think things will change and we may not even need this. More tez will be locked in contracts, and as more tokens launch, trading should happen - which would increase liquidity. I feel this intermediary proposal that increases the supply may be unnecessary. My only concern is that- we are setting a precedent for a supply increase- which I am not sure is the right thing taking a long term view of the protocol.

I would for example- be happy with a 10% of the 80 tez into a decentralized treasury that could be used by community to fund projects- Providing liquidity to a dex could be one such project that could be funded by the community.

Hey, everyone. New to the forum, but pretty active on Discord; been invested in the ecosystem since the ICO. I have been pretty passive over the years, but I feel like the team (core devs + Tezos Foundation) is at an inflection point wherein all stakeholders need to make some urgent and competitively superior decisions. The following discussion is not meant to be inflammatory, and I hope the team (again, core devs + Tezos Foundation) takes this constructively.

My background and day job involve institutional money management, so I am proposing an idea around central banking, which I think can be a unique way to gain a leg-up on all other chains/competition.

In referencing Liquidity Baking, I was pretty perplexed to learn that the initial idea is to further dilute the supply to fund the tzbtc liquidity pool. The proposed idea categorizes the add-on minting as “ingenious,” but the idea seems far from being ingenious.

  1. First of all, the Tezos Foundation (TF) is sitting on a pretty big liquidity pile. In hearing Danny Masters discuss TF’s spending rate, it seems like this xtz-tzbtc pool can easily be funded by the TF in good faith. I guess I don’t know the background and/or the background hasn’t been discussed with the community - but why WOULDN’T the TF want to fund this core liquidity pool?

  2. Here’s where it might be OUR opportunity to shine as a major competitor to all other chains. I have been active long enough in the crypto (and finance) spaces to realize/know that there will be a major correction to all DeFi solutions in the future. I’m proposing that the TF and core devs create core liquidity pools around major cryptos - so start with tzbtc, but then quickly expand into tzeth, tzgld, etc. The TF acts a central bank to ONLY these core pools; with an “in good faith” promise to provide a backstop to the core liquidity pools when/if there’s a run on the crypto market as a whole. This very well makes the TF the Federal Reserve/European Central Bank of the Tezos ecosystem, but ONLY for the core liquidity pools. I believe there are no other chains that actually provide this sort of safe haven mechanism to core liquidity pools. If it makes sense, the TF can convert some of its crypto gains from the past few months to fund these core liquidity pools and also enable a backstop to a flight to safety.

Please note that I’m NOT suggesting the TF absorb losses - all I’m proposing is the TF supply liquidity in times of duress. This can actually be an ingenious way to increase faith in Tezos as a solution, decrease volatility, and increase adoption of Tezos.

As an early investor, it seems myopic to further dilute early supporters of Tezos when the price hasn’t done relatively well vs. other competitors since Tezos was launched. This is a perfect step to alienate a decent base of supporters even further.

In summary, I’m proposing we avoid diluting supply any further, have the TF fund the liquidity in core liquidity pools, and [potentially] have the TF be the “central bank” of these core liquidity pools.

Thanks and keep up the good work!

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This is a phenomenal idea, but TF is so unsupportive of Tezos they refuse to even hold any of their $1,000,000,000+ stash of BTC as tzBTC, despite the fact that Bitcoin Suisse is their custodian and offers custodial services for both assets.

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Here’s another potentially potent idea for those who think the TF behaving like a central bank to core liquidity pools may lead to centralization: this structure (TF funding core liquidity pools) could be embedded in a sunsetting mechanism. So the TF provides a backstop to liquidity for 3-5 years before the core pools are self-serving (i.e. investor confidence has grown over time, there’s enough depth in the crypto markets, Tezos ecosystem has evolved, etc.). When the TF’s support for these core liquidity pools diminishes, it is THEN we switch to the extra minting per block as proposed in the original solution.

The idea behind the TF initially supporting these core liquidity pools is multifold:

  1. You further avoid diluting the supply;
  2. Cryptoverse gets to witness the strength of Tezos quasi-Treasury (in the form of the TF); and
  3. The core liquidity pools are not left to be funded by the broader Tezos ecosystem. Time is of essence, I feel, in that we can’t afford to wait another 6-12 months - AFTER the first tzbtc core liquidity pool has even launched - to get to a healthy capacity. The sooner you showcase strong stability, the sooner you’re able to attract investors/adopters.

The reality is that we have lagged in marketing and DeFi, so the TF supporting these core liquidity pools at the start may/will provide instant stability and a jumpstart to what I think is a major opportunity for us to make ourselves heard.

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I cannot speak for TF, but I can shine some light on why TF might not be able to fund/be a liquidity provider, and it starts with the SEC Digital Framework Guidance via Howey Test (yes, it’s about securities regulations). I would hope TF stays away from being a liquidity provider and the reason why will be explained below.

First, keep in mind that SEC Digital Framework is just guidance, it’s not U.S. law per se, but it holds a lot of weight in terms of whether you draw the ire/attention of the SEC. The last thing any of us want, is to get an SEC action/target letter. For reference to the Digital framework, please see this: SEC.gov | Framework for “Investment Contract” Analysis of Digital Assets

A quick primer on Howey’s 4 factors on how it interprets what an “investment contract” is (if it’s an investment contract, then it’s a security → this is law):

  1. An investment of money, 2. In a common enterprise, 3. with an expectation of profit, 4. solely from the efforts of others (SEC v. WJ Howey, 328 U.S. 293).

Next, we look at the SEC’s Digital Framework Guidance. The part of the framework that we need to focus on is “1. Reliance on the Efforts of Others”, specifically when it says "although no one of the following characteristics is necessarily determinative, the stronger their presence, the more likely it is that a purchaser of a digital asset is relying on the “efforts of others”.

One example they give in their factors that they evaluate under this prong is “An AP (AP = active participant, in our case TF, or the issuers of the tez) creates or supports a market for, or the price of, the digital asset. This can include, for example, an AP that: 1: controls the creation and issuance of the digital asset; or 2: takes other actions to support a market price of the digital asset, such as by limiting supply or ensuring scarcity, through, for example, buybacks, “burning” or other activities.” How this could apply to TF if they were to provide liquidity, is that a case can be made they would directly be affecting the market price of tez by providing liquidity.

Yes, it’s a little bit of a stretch, but that argument can certainly be made. Now, this isn’t really the factor I want to focus on, but the next example the SEC gives, which is "An AP has a continuing managerial role in making decisions about or exercising judgment concerning the network or the characteristics or rights the digital asset represents including for example: Determining whether and where the digital asset will trade. For example, purchasers may reasonably rely on an AP for liquidity, such as where the AP has arranged, or promised to arrange for, the trading of the digital asset on a secondary market or platform. Here, if TF was providing liquidity, you can make a very strong argument that this prong would be fulfilled because TF is providing liquidity for a secondary market (dexter or some DEX).

Now, just because we fulfill one of the factors, still doesn’t mean we’re a security yet, because you have 3 other factors, namely 1. investment of money, 2. in a common enterprise, 3. with an expectation of profit. For the sake of brevity, I don’t believe the other 3 factors need analysis as they are easily satisfied for example: 1. Investment of money (money contributed to the fundraiser), 2. In a common enterprise (Tezos network), 3. With an expectation of profit (people who contributed to the fundraiser more likely than not are expecting some sort of return).

Now, we might be asking ourselves, why hasn’t TF said anything or responded to any of this? Well, there’s an old adage, “let sleeping dogs lie” and in our case here, it means, TF as a billion dollar + entity, there are many eyes watching their every move as opposed to a single person and why draw any possible attention from US regulators? We all know TF is not new to litigation, and as I have discussed in many articles covering the previous private litigation, it’s a big time and resource consuming endeavor that no one should be fond of, especially given the history of Tezos. As a US lawyer, our job is always to be consulting our clients to be more risk averse, so in this case, I pose to you, why should TF take an unnecessary risk? It would seem the risk vs reward in this situation would lean more towards there being more risk and little reward, especially given the SEC’s regulatory climate in that the game has changed especially after the fact that they went after XRP. Now, why won’t TF come out and say they can’t provide liquidity, well, there also an argument to be made that by making a statement you could be indirectly affecting the market by the statement itself, think Elon Musk and why regulators are not happy with his btc and doge tweets. We now also know the possible consequences of what happens when the SEC comes after you in light of XRP, you get a cascade of US CEXs delisting you. In my opinion, it’s just not a battle worth fighting for at this point. I’m not trying to downplay the idea, but until you evaluate the legal risks associated with becoming a liquidity provider as such a large entity, then this is not an idea that should be approached lightly or without much careful legal analysis before any action is undertaken.

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