[Ongoing] Liquidity v2

Objective: Decentralize liquidity provision and make it economically sustainable

Key results

1. Rebalance liquidity pools (Mar)

Current iteration:
Fixed reward rates for each pair. This has created a situation with drastic disparities in the size of liquidity pools. Currently, the BTC pool has ≈$20M, the DAI pool has ≈$6M, and the LTC pool has ≈400k.

Next iteration:
The fixed total reward for pairs. APY will be rebalanced according to changes happening in the liquidity pools.

This is a temporary solution that will be replaced when we release Privacy v.2 and finish pDEX improvements.

2. Implement a minimum trading fee (April)

Currently, there is a 0% trading fee for all pairs in the pDEX. Economically, it does not incentivize liquidity providers to lock funds in pools, so the pDEX fully depends on additional network incentives like the Provide APY.

To solve this dependency, we’d like to implement a minimum trading fee that rewards anyone that uses the Add feature to trustlessly provide liquidity. This way, we can end the current trusted setup created by Provide.


Uniswap and other Ethereum-based DEXes use a standard fee of 0.3%. We believe that privacy is a unique feature offered by the Incognito pDEX, so the fee for anonymous trades should cost ≈ 0.25% for direct trade and 0.5% for cross-pair trade.

Do you agree? Should the fee be different? Let us know below this post.

3. Rebuild the pDEX (May)

Major changes are coming to the pDEX once Privacy v.2 is released:

  1. Removing temporary address (used during the trade process)
  2. Removing the “deposit” step while providing liquidity via Add
  3. Redesigning the UI for providing liquidity via Add

These changes will make trading in the pDEX faster and easier to use.

Once these upgrades have been implemented, we will begin migrating liquidity from trusted Provide to trustless ADD.

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A few notes on the next iteration of Provide, as described in:

1. Rebalance liquidity pools

This should bring some clarity to the way Provide will work during the next couple of months:

  • The incentive pool for Provide will contain a fixed amount of PRV that will be equally split between the top 5 PRV pairs: BTC, ETH, DAI, USDT, and XMR.

  • The initial pool size will be ≈ 10% of the block reward.

Example:

Pair Current liquidity Non-PRV value in the pool Reward pool in PRV (annual) Approximate APY
PRV-pBTC $20,005,412 $10,002,706 78,448 2.4%
PRV-pETH $8,940,222 $4,470,111 78,448 5.3%
PRV-pDAI $5,982,858 $2,991,429 78,448 7.9%
PRV-pUSDT $4,267,084 $2,133,542 78,448 11.0%
PRV-pXMR $4,075,567 $2,037,783 78,448 11.5%
PRV value in top 5 pools $21,635,572 392,242 10.9%

In addition to this, around ≈ 1M PRV from Provide is locked in vNodes, which generates additional fuds to keep the APY for PRV at ≈ 21%

In accordance with this setup, we will initiate new rates for Provide beginning March 31:

Coin Current March 31
PRV 21% 21%
BTC 10% 3%
ETH 10% 5.50%
DAI 13% 8%
USDT 10% 11%
XMR 13% 11.50%

In April we will give an estimation on when the rebalancing process can be automated.

As for the coins that are not whitelisted above:

The APY for LTC, ZEC, and DASH will remain the same until the minimum trading fee is implemented. After that, those coins will be removed from Provide.

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Many things have to do with another I’m getting a little bit confused :sweat_smile:

So to make sure I understood…

Provide APY will change and then Add v2 will come and Provide will be entirely “deleted” and moved to Add v2… Is that how it will be?

Sorry if I missed something just want to really get it :sweat_smile:

@Estem. Not deleted overnight, but yes. It will eventually be phased out. They will run in tandem over the next 6 months.

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I see, thank you :grin:

I hope Add v2 makes me not miss Provide :cry:

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When you start getting a portion of the trading fees, you’ll forget it was even there.

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My suggestion is 0.1% for direct trade and 0.2% for cross-pair trade. And those ratios should be able to be modified by DAO governance at any time.

My 2nd suggestion is about a discount option on the trading fees. The accounts which stake 1750 PRV ( i.e. validators :slight_smile: ) can benefit from a 25% (or some other ratio) discount in the trading fee. So the validator accounts can trade with 0.075% for direct trade and with 0.15% for cross-pair trade. I think this encourages traders with high volumes (or high number of transactions) for staking. So this would increase both decentralization and PRV’s value (because of decreasing liquid supply).

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I like and second the post made by @abduraman:+1: :sunglasses:

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Regarding trading fee, my opinion is this:

  1. People who trade against AMM already suffer from the slippage that increases disproportionally to the trading amount.
  2. The best thing about blockchain is that its fee is a relatively fixed constant, regardless of how much money is being transferred.
  3. I believe 99% of the trading volume on pDEX is from people who run arbitrage bots (me included). Charging a percentage that is higher than CEX (which is usually at 0.1%) would just drive them away.

Therefore, I’m strongly opposed to charging pDEX fee based on percentage.

I’d be happy to pay a fixed fee, even if it is 10x higher than a normal transfer.

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I agree, fees are ridiculously low and this needs to be adjusted.

Hey @quinto thank you for the feedback and idea with constant fee. I assume that you look at it from an arbitrage/trading perspective.

What about from a liquidity provider perspective, would a fixed fee generate enough interest to provide liquidity?

In this case, the trading fee should show the real picture of how important privacy for our users, and we will see real trading demand on anonymous swaps.

Hey, @abduraman thinking about the way to allow liquidity providers to set up fee. Regarding discount for validators. it might be too complex to bring such functionality on the pDEX in upcoming sprints.

The goal here is to migrate the whole liquidity from Provide to ADD once it’s technically possible. Once it’s ready, incentives will be moved there, and liquidity should follow.

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We have a few options in regards to the direction we could go.

Straight Forward Options

  1. Give Liquidity Providers a cut from the block rewards

  2. Raise the trading fee’s


Crazy Options

  1. Have a monthly / weekly membership fee to gain access to trade via the liquidity pools. If we math it out in such a way that your average Liquidity Providers would be able to earn enough from the membership fee to cover the membership fee for themselves, it would incentivize people to put into liquidity so they can trade for free.

  2. Have a decentralized gambling platform built into Incognito. Profits from house edge go straight to liquidity providers. No one likes to gamble more then people with anon money. Who wouldn’t want to provide liquidity if they get to earn profits from gambling.

  3. Provide a Liquidity Loan service. Basically if someone has 0.5 pBTC, they can take out a crypto pCoin loan, by locking their funds in to liquidity (0.25 pBTC / xxx PRV). They are only allowed to pull out of liquidity once they pay back the loan plus interest. If they don’t pay it back, it’s locked in liquidity forever. The value of the loan would be 50% of the total liquidity collateral value. It would be beneficial to lend the PRV/pCoin, as you are getting pBTC in liquidity at a cheaper rate if they don’t pay it back. If you wanted to insentivise regular liquidity providers, they could get a majority of the interest payments sent directly to them as a reward (we would want to stash some PRV profits to have bigger cash stack for more loans). We could take a small fractional amount of PRV from block rewards to fund the loans.

Hey @Revolve, regarding the straightforward options, that’s what we do. We’ve set up a budget ≈ of 10% of the block reward during the transition and split it between white-listed pairs.

On the other side, bringing trading fees gives incentives to provide liquidity for all other pairs that are not on the list.

Regarding crazy options

  1. Membership system would be difficult to implement in a decentralized way
  2. Gambling is in a gray area, so I do not think that we’ll go with that
  3. Regarding loan service, I think it’s an excellent additional incentive for liquidity providers. There can even be two options to use your pool shares: to borrow money against it or mint a native stable coin. Both worth options worth researching deeper.
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I would love to see a native stable coin.

Borrowing against liquidity is definitely an interesting idea as it adds more utility for Liquidity Providers. Sometimes, the reason Liquidity Providers pull out is because they need some quick cash, this solution solves that problem. It also gives your average user the ability to take out crypto loans privately while supporting the Incognito ecosystem. Also crypto loans and interest earned from them is big business, I bet Liquidity Providers would love the extra income.

Basically a bunch of ramblings. I was just running through my mind and I spilled it all out on here.

The issue I see with minting a stable coin backed by liquidity provisions is that it wouldn’t be that stable. To make it stable, you would have to calculate the value of the provision in USD first, and then mint the associated amount. Interest would have to be paid in the minted coin, which would lead to more of a demand for the coin increasing the price. If the price of the coin is high, you would have people with large amounts of liquidity take out a loan just to mint more coins, immediately sell them, and pay back their loan. If people default on their loan, the price of the minted coin becomes low. Which would be a good opportunity to accumulate I guess because if you have large liquidity provisions, you could actually take out loans for super cheap, possibly even profit if it were low enough.

Whats the incentive to provide liquidity for this minted coin? Would you be able to mint more coins by putting up your liquidity as collateral? The coin itself would be inflationary, because more and more coins would get minted and none are getting destroyed, but debt would also increase giving demand (idk).

Minting the coin would mean you don’t need to supply capital for the loans, but there would have to be liquidity pools to start it off. Higher rewards would definitely have to be given to people who supply liquidity for this minted coin. Having higher rewards would make it’s cost be at a premium, but liquidity providers would take advantage and profit of that premium to make it stable.

I still think we would need some sort of sink, i’m not convinced that the debt will cancel out the inflationary aspect of the coin. Perhaps the initial amount minted gets completely destroyed when you pay it back. That would work, as the interest would not be destroyed and instead delivered to liquidity providers. It would keep the demand in check as you need more then was minted.

TLDR:

  • When you take out a loan, mint native stable coins based on 60-70% of the USD value of provided liquidity?
  • Incentivise providing for the Liquidity Pool for the minted coin (more so then regular pools).
  • Destroy initially minted coins on loan repayment, but don’t destroy the coins required for interest, instead deliver those coins to all liquidity providers as a reward.

I think that should theoretically keep everything in check. The coin will be kept stable by liquidity providers. Also no extra capital is really required to give out loans. We just need to make sure the liquidity pool is big enough.

If the coin is cheap, Liqudity Providers would buy so they can take out loans for cheap and pay cheap interest rate (They’d wanna buy more crypto, especially with a close to 0% interest rate). If the coin is expensive, Liquidity Providers would mint more coins (flooding the market), so they can gain a higher percent loan on their liquidity then they would normally be able to. If the coin kept going up for whatever reason, it wouldn’t be able to go past 100% of the liquidity value. Othewise people would be just selling their liquidity for profit lmao. If the coin was to stay low for some reason, debt would create a buying pressure to increase the price.

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I scrolled through here and didn’t see this question asked or answered, but sorry if this is a repeat. Will one-sided liquidity be an option like it is with Provide? IMHO this made it much easier to participate. I know this can skew the liquidity pools, but for those just entering the space, it makes everything simple. It certainly did for me.

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Once Add V2 is complete, provide will start to be phased out over 6 months. After that, you will have to pair your investment to earn rewards.

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What about USDC? Is the view to switch to tether or dai?

Moreover, are these changes effective today? Android app still shows old rates

I still do not understand how this will work…can you just add one coin, or will you have to add a pair, eg PRV/BTC like on Uniswap? I have to admit that any pair with PRV would far exceed my personal risk tolerance for IL, since PRV is still just too volatile, low market cap and illiquid, at least for now. In this case, it probably would not only be me, but a lot of people who would be scared. On the other hand, I would gladly contribute a pair like BTC/XMR.

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Are there plans to implement single sided liquidity into Add v2 or will pairing be a requirement? It’s a big leap for single providers to match their investment with PRV and assume the risk of impermanent loss.

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Hi abduraman, I liked your idea. If we just increase the trading fee, we will lose traders that help to keep pdex prices following the market. Paying LP is very important either, so we can use a fee from block rewards. Staking PRV for trade fee discount sounds very nice. The discount be progressive based amount PRV staked.

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