Liquidity mining on Tezos

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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Hey, @AlexL, good to great insights into the regulatory considerations. I myself operate in the 501(c)(3) and 501(c)(4) arenas in the US, so am generally aware of the lay of the land. I actually feel there are ways around the SEC, but won’t go there yet [an example would be to spin up a “sister” US-based 501(c)(3) which can then invest in for-profit enterprises/ventures which are mission-aligned]. Also look up Collective Action Funds (if you aren’t already aware).

I want to take your entire argument and simply point you to a DAO pool. If the TF can’t do it, with all due respect, spin up a DAO Treasury whose sole purpose is to provide liquidity to the core pools as I described above. There have been enough governance tokens launched elsewhere where the coast is generally clear of the SEC because of decentralization. If the TF is too worried about losing control of millions, establish a sub-advisory council for the DAO so the DAO sticks to its mission.

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So the reason TF refuses to hold any of their $1,000,000,000+ BTC as tzBTC is because of the SEC? If not, why?

I am only offering potential reasons on why they might not hold all their btc in tzbtc(see above about SEC digital framework) and why they haven’t spoken out about it(taking on unnecessary risk). If you have ever been involved in any US litigation, the #1 advice all lawyers give their clients is: do not make any statements (gag rule). Period. The reason why we tell our clients to not make any statements is because, unless you can predict the future, anything you say, can and more than likely will be used against you in future proceedings. So, why take the risk and say something that can potentially be used against you in the future? It’s basically taking on an unnecessary risk. Now, I’m not saying that TF shouldn’t communicate at all, but on matters like this? If I were their attorney, I’d advise against them responding to anything on this topic.

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Oh SEC. It explains everything.
Which one of those 4 factors does holding tzbtc violate?

“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.” (4th factor of Howey- reliance/efforts of others factor)

The SEC digital framework guidance speaks specifically on the issue being a liquidity provider and how this thread has progressed, people are wanting TF to be a core liquidity provider, so that would be a risky move / drawing attention from the SEC. Further, in US law, if a regulatory body gives you guidance and specifically calls certain actions out, via examples, and you go against their guidance, then there is a much greater likelihood that they will go after you because they will say you know/should have known better because they specifically called X action out and you went against it. The “I didn’t know any better” excuse goes out the window and so they will typically be heavier handed in terms of punishing.

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So again - for forces that be - this is not legal advice, or maybe it is: spin up a DAO pool which aims to promote “the Tezos protocol through grants and other capital deployment vehicles.” Where have I seen that quote before? Oh wait, it is the mission statement of the Tezos Foundation.

I’m not trying to be facetious, @AlexL - I’d love to learn how the Howey test applies to decentralized, community-driven pools of assets like a DAO. Look at US-based teams and tokens like BarnBridge which have managed to do just fine with the SEC in launching DAO pools - with proper legal guidance and outside the bounds of a nonprofit. Separately, I have also raised ideas around US-based 501(c)(3) and 501(c)(4) organizations above which are mission-aligned (emphasizing mission based on the TF’s mission statement).

Ultimately, I think this legal discussion digresses from the crux of the issue; where there’s a will, there will be a way - if the TF actually wants to support the Tezos protocol by funding core liquidity pools, without raising antennas at the SEC, they will spend capital on formal advice on a legal structure. Now, if they inform the community that launching core liquidity pools is the #1 priority and needs to happen ASAP, without waiting for legal advice, I’m all game.

My only advice to the core devs + TF is that do not dilute the supply further if you have ways around it. Not to mention, competitors like Ethereum are actually going to adopt deflationary measures soon. I do understand how PoS incentives work, so my issue isn’t so much with baking/staking/inflation/deflation, but rather with deliberate decisions around diluting the supply when you may not have to.

You also have a live, working example in the form of Dexter - just look at the slippage and the spreads and the overdependence on the broader community for liquidity and depth in Dexter pairs. In a way, the lack of depth/liquidity on Dexter is causing friction over at Kolibri.

  • Is Dexter a great DEX? YES.
  • Could Dexter sustain/succeed without help? PROBABLY YES.
  • Can Dexter use liquidity and depth from a “DAO-like Treasury” right now? HECK YES.
  • Should Dexter be successful in three months rather that six-to-nine months? MOST DEFINITELY, YES!

On the last point - given enough time and Tezos’ capabilities, I think Dexter will be a-OK. One could also argue that Dexter needs an incentive mechanism like an LP/governance-token to attract liquidity providers. However, such an LP/governance-token won’t lead to outright dilution of the Tezos supply. Contrast this with what’s proposed in the Liquidity Baking idea above: liquidity providers will have the incentive in the form of 2000% rewards, BUT those rewards come at the expense of existing investors through further, perhaps unwarranted, dilution.

The other factor to contend with in the Tezos ecosystem is urgency; to paraphrase Danny Masters from one of his recent interviews, we needed a protocol like Compound on Tezos, like yesterday. If there are legal ways for the TF to catalyze solutions like core liquidity pools on launch day rather than waiting on the kindness of the community for months [to attract liquidity], those solutions should be proactively pursued. And pursued without actually diluting the supply with the potential help of TF’s own multibillion-dollar liquidity pool.

Let’s add a bit of nuance here. Just because you’re a foreign entity, doesn’t mean you can eschew US regulation. You quote TF’s mission statement, which talks about capital deployment vehicle, but you’re missing the part that should be pretty clear and unspoken, or namely “within legal bounds”.

How Howey applies to decentralized communities? Well that’s to be determined as the SEC is grappling with this concept as we speak. Yes, we have guidance from Hinman’s speech (2018) which was later affirmed by previous SEC Chairman Clayton that they believe certain blockchains are “sufficiently decentralized” not to constitute a security anymore. But does that mean that concept is static? Probably not, since we know it’s a constant balancing test, we have case law indicating things that was once a security and not being a security anymore and vice versa, and we have previous CFTC chairman saying that they are keeping an eye on Eth 2.0 and whether moving to POS they will need to revisit their analysis of whether it is a commodity, which he is quoted saying the SEC is doing the same examination which is hinting that the security analysis is being revisited by the SEC when the time comes. Lastly, can DAOs be securities? Absolutely, just look the “DAO Hack” guidance from the SEC in 2017 and Slockit. The SEC took the position that the DAO they were creating was indeed a security. I actually wrote my LLM thesis on this issue in 2019 and still working on getting it published in different law reviews, and I would be more than happy to share it with you. (as you can imagine, the landscape is constantly changing)

The next example you give, is Barnbridge a defi protocol built on ERC-20. What I don’t quite understand, which you might be able to clarify is what does that have to do with a foundation providing liquidity? Is Eth foundation providing liquidity to Barnbridge? I looked through their documents and it doesn’t appear so, so what does that have to do with TF being a liquidity provider? A bit of nuance is needed here again. In my posts above I am speaking strictly about TF being a liquidity provider, not the issue of whether US Sec Reg allows DAOs (which they do). Your idea of launching a US based entity under 501c3 or 501c4 is a possible idea, but it would be better suited in a 501c6, however, you still have the issue of the SEC digital framework which doesn’t like AP’s/issuers touching the market at all, so therefore if it were to possibly work, you would need someone not affiliated with TF at all taking the initiative.

Once again, a bit of nuance is needed. If you think the SEC isn’t smart enough to catch on to things like the above quote, then you’re underestimating the SEC. If TF funds something to get legal advice to form a legal structure to fund this endeavor, then the SEC could probably do something similar of piercing the corporate veil to find a security violation. Now, could TF fund legal advice to form a legal structure and not trigger sec regs? Yes. But the moment they do actions outside of getting legal advice etc., then they’re treading some rough waters, but let’s say they get the legal advice and figure out the legal structure and post it as informational material and then someone in the US (unaffiliated with TF) takes the lead and initiative to spin an entity up, would that trigger sec violations? Maybe, maybe not, but this would probably be the safest scenario IF it were to happen.

Next, you bring up the issues of dexter and liquidity. No doubt there is issues with this, however, relying on TF to solve this by being the liquidity provider is a very risky move as explained in my previous post. You don’t see Eth foundation or Btc foundation being liquidity providers. I wonder why? Coincidence? Maybe maybe, not. If I were a betting man, I would bet it wasn’t by coincidence.

LP/governance token for dexter? That would be on the creators of Dexter and their decision alone. TF funded the devs to create the project and that’s it. They have no control over Dexter and how it operates as the only relationship between the two that I know of, is just that TF funded the devs to create it. The decisions that are made in Dexter are on the devs that created it, which, once again, some nuance is added here, in that Dexter and TF have no relationship besides TF funding them to develop it. Business decisions made by Dexter are by the Dexter team, not TF (that’s the point of decentralization).

To your last point on urgency. Yes, I agree urgency is needed, but I would add, urgency with caution. The last thing the ecosystem needs is another round of litigation, this time by a regulatory body. I would say the harm of am event like that is 1000x greater than the urgency needed to get liquidity into something like Dexter. Are there ways to do it? Yes, but to have it in open discussion like this and trying to draw TF to respond is NOT the risk averse way of going bout an endeavor such as this.

I do applaud your effort in highlighting these issues and getting creative, but there are probably better ways to accomplish what you’re seeking as described above. I do love your energy and tackling these issues, which shows our community is thoughtful and caring about the overall ecosystem. I would be more than happy to brainstorm with you on these topics, just PM me. :grinning:

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@AlexL I’ll gladly PM you to discuss an ultimate solution, given the two of us were to magically come into variance power over TF funds :slight_smile:.

All your points are well-taken and I wasn’t challenging the lawyer in you - but like a good lawyer would, you took to some of my examples as argumentative… which must be a sign that you’re a good lawyer. Hah.

Regardless, the examples (BarnBridge, Dexter, etc.) were meant to be just that - examples. Not concrete proofs of solutions which the TF should actually pursue. As you concluded, there are probably other ways to go about it - and my intention with my original post wasn’t to invite the TF to comment on something concrete… just that the TF (if it is involved) along with the core team reconsider the idea to further dilute the existing supply. And if there are ways, avoid depending on the benevolence of the greater community in jumpstarting some of the core solutions.

Ultimately, I’m on the same page with you on the topic of the SEC.

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TF providing liquidity on dexter is a terrible idea. Assuming dexter releases a governance token (they’ll fail if they don’t), do you really want TF having sole control of dexter from liquidity mining?
Also there is absolutely nothing concerning the SEC preventing TF from simply holding tzBTC. To suggest otherwise is an irresponsible and dangerous conspiracy theory.

I realize I shouldn’t have mentioned Dexter since folks would interpret that I’m promulgating the idea that the TF should just back Dexter - I know and agree that it is a terrible idea. What I did want to bring up is how Dexter is struggling (both in terms of adoption and time/urgency) due to lack of liquidity, nothing else.

Ultimately, my beef is simply with the idea that XTZ supply should be diluted further + the prospect of the core liquidity pools struggling to get traction for months because of their overdependence on the community.

Who should pools depend on if not community?

Since LB is postponed is anyone else interested in a discussion about which pair we should subsidize?
As I mentioned earlier I’m all in favour of subsidizing an xtz / stablecoin pair instead of tzbtc.
Not only it seems reasonable to have liquidity to be able to hedge or trade against a low volatile to fiat asset, it also gives an opportunity to drive adoption to our native assets, whereas tzbtc is a custodial asset which I’m not a big fan of
There’s a few months before the next proposal so we might have checker up and a few usecases (and probably a DSR-like mechanism) for Kolibri to help maintain its peg

My point isn’t that the broader community shouldn’t support the pools - and again, I’m not talking about ALL pools or setting a precedent. I’m just focused on these core pools which are being deemed essential to the ecosystem. Ultimately, the community and its participants will be the market-makers. And the level of adoption will drive success.

The only reason I’m focused on this topic is because there’s the proposal to dilute the supply even further when the TF could [if there are legal ways] potentially jumpstart these core pools with the liquidity it ALREADY has available.

Now, if there are no legal ways around this, I understand. But I at least want the TF to explore before we claim the idea to dilute supply as “ingenious.”

As far as the long-term goes, absolutely, the community drives these pools forward (I hinted at the sunsetting mechanism if the TF is able to get involved at inception).

I do want to point folks to the proposal again – the whole reason this is being proposed is to compete with pools like Uniswap. And I think this is being proposed because the sense of urgency is being felt across all parts of the Tezos ecosystem - if the community were so advanced/seasoned, we wouldn’t be discussing this topic because we would already have had an answer to Uniswap. Which highlights my other point - that I don’t think the community will be able to get these pools to multimillion dollar levels on their own in a couple of months without help.

Decentralize, sure – but nothing wrong with getting some help along the way; especially if the helper is something/someone the community funded (at least the ICO investors like me and perhaps everyone else in this thread).

In my first response, I did mention that the core pools be quickly expanded to include other assets like ethereum, gold, etc. I do like the idea of also including cross-chain stablecoins. I don’t think there’s anything wrong with launching tzBTC first given the peg can be maintained/sustained.

TF is on its own, I’d love to see TF add liquidity but they have to act with respect to the laws, we can’t suggest them this kind of actions

I believe the whole point is to bring liquidity to xtz traiding pairs, we’re not in a position to compete with multibillion dollar uniswap

And I don’t see a reason to subsidize eth or gold pairs on the protocol level, a liquid major pair is enough
Suibsiding an xtz/stablecoin pair is enough
having this stablecoin listed on a decent cex would be great though