Just a quick shout out to everyone involved in this exploration/assessment with so much rigor, open mind and mature manners. Missed this in the forum during the DMan days. This quality dialogue of people smarter than me makes me believe in Sovryn. Cheers folks!
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This thread has been extremely insightful. For me one key takeaway is that we are paying an exorbitant amount to “rent” liquidity.
Using the USDBTC pool as an example, there is currently a total of a little over $7m of liquidity in that pool. On a weekly basis, we are paying on the order of $54k USD in the form of SOV to attract that liquidity. That implies an annualised interest rate of ˜40%. In other words, we are paying 40% interest to rent that liquidity.
This interest rate, by all accounts is high. It would be cheaper (putting aside IL for a moment) to just borrow the funds from our lending pools.
An alternative to renting is buying. Buying has higher upfront cost, but you get to keep what you buy.
So an alternative that presents itself is to buy liquidity, rather than rent it. How could we buy liquidity?
One way we could go about this would be to hold a weekly SOV dutch auction. We would sell SOV, pre-staked in 3 year vesting for BTC. The market would decide what discount to the liquid SOV price it would place on such SOV. The funds raised from these auctions could be placed in the pools which require liquidity.
With the advent of Zero and the Sovryn dollar, we could take this further. Instead of a XUSDBTC pool we could have a DLLRBTC pool (Sovryn Dollar/RBTC). Some of the BTC raised in auctions would be used to borrow DLLR at 0% interest rate and paired with BTC to provide liquidity in the DLLRBTC pool.
The BTC we raised we would get to keep and the next year or so may prove to be a fruitful time for Sovryn to acquire BTC. Further, once sufficient liquidity was raised, we could stop the auctions.
Of course, this is not entirely straightforward. There are risks and complexities.
- To achieve $7m in liquidity, even assuming the auction cleared at no discount to spot, we would need to sell $7m in SOV. If part was to be overcollaterized to borrow DLLR, we would need about 30% more than that. Buying DLLR, at spot, in this situation would likely be preferable.
- This would appeal to a different set of users. LPs LP because they want to “lend” not sell their assets. So we might lose the LP user type, and at the same time dampen demand for spot acquisition of SOV. At least a subset of people buying spot SOV are doing so as a long term investment. For this user, the auctions would probably be a better deal than spot purchases.
- The protocol would be directly exposed to IL, and this cost would need to be added to the cost of the auction discount. Of course, the protocol would earn the trading fees, so this is somewhat offset.
- The value of assets acquired could drop.
With regards to point #3, we could potentially continue LM rewards while we were ramping up the sales process.
In any event, 40% annualised to rent liquidity is not ideal long term. Buying, instead of renting seems to be more in tune with our long term focus.
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The difficult part is to get demand for us$ 7,000,000.- in sov (in exchange for btc) in those Dutch auctions under the conditions you describe. No doubt the discount will help, but will it be enough? (Maybe rights or benefits could be added to those who attend these auctions (nft, free fees, airdrops?) If this is achieved, the rest of the points you raise I think are possible.
Perhaps simultaneous auctions could be held at 1, 2 and 3 year stakes, with a smaller or larger discount depending on the time commitment, which could vary between different investors, depending on their risk aversion, even with different unstake penalties to the standard ones.
I have not analysed whether there is a risk that current stakers will unstake their sov by paying the penalty, and sell their sov to enter the Dutch auctions again at a better price. In any case, it is neutral.
I don’t know if this is in line with Sacro’s idea of reducing the stake growth rate, but on the other hand it would be a great saving for the protocol, assuming the risks described.
Finally, it remains to be seen where these sov would come from. I imagine again from the Adoption Fund. If so, I have doubts as to whether it is the proper use of this fund to provide liquidity to the protocol.
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It may be a huge waste of resources at the moment to subsidize most of the current liquidity pools.
The best thing for SOV holders and the protocol could be to minimize the SOV inflation as much as possible except for those that accrue to stakers so that if you stake you essentially do not get inflated away.
We need to see some organic growth first and see where that organic growth is coming from and then perhaps subsidies can be allocated to boost that organic growth.
The only subsidized pool should be made in order to provide adequate liquidity for the SOV/BTC pool.
Compensating for impermanent loss generally might not be the right way to go. We could instead focus on one or two pools and get the liquidity in that pool to the point where trading is the most competitive in terms of price slippage/price impact against any other dex. We should be aiming to get BTC/XUSD cheaper to trade than it is on curve.
Is providing liquidity rewards the only way to achieve this?
This seems like an extreme solution to this problem. Wouldn’t it be prudent to carry on down the path that has been laid out before scrapping for something this extreme?
I fear there could be unintended consequences of this action, but i’m willing to be proven wrong. One of the often discussed obstacles to protocol growth is adoption, do we want to limit the ways in which people can interact with the protocol? Especially now?
I also wonder what happens to the liquidity currently in the pools if you eliminate their ability to participate in the pools. We run the risk of all of that SOV being sold into the market at once, and/or having all/some of it getting staked, exacerbating our staking problems.
(full disclosure, i’ve been in the SOV/rBTC pool since day 1) This also would feel a little like pulling the rug out from under the liquidity providers. Maybe not a full rug, perhaps just a welcome mat, but still. Thank you for providing liquidity while we worked through all the rough times, thanks for taking it on the chin with the IL, now we’re going to pull it out from under you before you have an opportunity for it to come back around. And yes, I do understand both sides of the IL argument, its a risk you accept when you deposit into the pools. I just wonder how alienating this could be for existing LP providers if we just turn all of it off all at once.
My point is, basically, seems like experimenting with adjusting the rewards in the pools, which we’re already doing, is a more prudent path than starting to turn features off altogether, especially now when adoption is the biggest concern.
btw when I was an LP, the biggest problem was that I had to discount the rewards by a huge amount due to the expected inflation rate and decline of SOV. I only had a limited amount of liquid SOV vested that I could use to hedge the SOV I was earning from providing liquidity. Eventually this was no longer worthwhile doing because it wasn’t scalable and the only pool that was worth it was the BTC/ETH pool.
As a former power user of Sovryn and one who sees the future potential, I sincerely think that if the protocol can do one thing and that one thing was the best way to do that one thing across the entire defi, then that would bring me back. And I think it has to come down to the cost of doing that one thing because that is the only objective thing that people can agree on vs whether something is more user friendly or secure etc.
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I understand your point, and this conversation is probably best explored elsewhere than in this thread, but i don’t think the vision of Sovryn was ever to identify one simple functionality and keep the focus super narrow. Quite the opposite, perhaps to the detriment of adoption at times.
What would that one thing even be? Specifically?
I’m a current power user of Sovryn, and i’m most excited about the some of the new features on the horizon, and one reason is because it broadens the ways in which i can interact with the protocol.
How much liquidity do we need to target per pool? For example, if we want trades up to X size be under Y slippage, what amount of liquidity do we need? That will likely dictate some of our our rent vs buy decisions.
I’m a fan of any sort of PoL, but would it be difficult to set-up the dutch auction? Do you have an estimate on how much dev time? Could you walk through a more detailed example of how you see this working in practice?
Are you implying we borrow DLLR against rBTC…or SOV? If latter, I’m extremely hesitant until the token gains consistent stability.
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Perhaps a trivial point, but what happens if we go down this path, make all the necessary announcements to draw attention, and then the demand doesn’t show up for the auction? $7m is a pretty big ask right now. What does that do for confidence in the project? What is plan b?